The role of retainage in a construction contract

At our law firm, we represent parties to a variety of construction contracts. Our clients include contractors, owners, subcontractors, construction companies, developers, suppliers, architects, engineers, lenders and others. We provide many services vis-à-vis construction contracts, including negotiation, drafting and review of contract provisions. 

One important term of a construction contract is retainage, which refers to a percentage of the contract price that the parties agree may be withheld from payment to the contractor until the project is complete. Typically, the retainage is imposed on the general contractor, which in turn imposes the same term on its subs.

Depending on the situation, the parties may negotiate unique retainage terms: 

• Varying the percentage withheld
• Releasing some or all the retained funds upon partial completion or completion of a particular step in the project
• Releasing some retained funds to a subcontractor if it finishes its work early in the overall project 

According to Business.com, more than 90 percent of contractors encounter challenges in collecting retainage amounts when due. The article provides suggestions for preventing retainage disputes: 

• Be sure the contract clearly describes all retainage terms, including what specific work triggers the payment obligation.
• Consider altering the size of the retainage for new clients with whom you do not have a historical working relationship.
• Agree to procedures to follow to adjust retainage terms if there are add-ons to the original work that arise during the project.
• Consider a “pay-when-paid clause” that requires the general contractor to pay the retainage to its subcontractors when the contractor receives those funds.
• Agree up front on penalties and legal consequences for noncompliance with the retainage arrangement. 

When retainage is not paid as agreed in the contract and a dispute arises, sometimes just opening the lines of communication is enough to prevent a log jam over the issue. If the owner was dissatisfied or uncertain about part of the work performed, the parties may be able to resolve the issue quickly and the funds released. 

If the parties cannot resolve their retainage dispute through negotiation, they could consider mediation or arbitration as a quicker and cheaper way to resolve the dispute than a lawsuit. But in some cases, filing suit or pursuing remedies under a mechanics’ lien may be necessary.