Retention Bonds An Alternative to Waiting for Retainage

The surety then investigates and, if the claim is valid, pays out the retainage. Construction is one of the hardest industries to manage cash flow in, with contractors often facing large up-front costs and frequent, long delays between expenses and payment. The industry’s retainage practices throw another wrinkle into the process. While retainage is sometimes used in predatory ways, contractors can protect themselves by understanding the rules, their rights, and the tools available to them to collect what’s due. On top of that, it can take years for subcontractors to receive their retainage payments.

Question: What are the benefits of using retainage in construction projects?

Contractors should ensure that payment schedules specify retainage percentages and release conditions, which reduces confusion and strengthens relationships with clients. Did you know that retainage delays can tie up 5–10% of project funds for months, impacting cash flow for over half of construction firms? Effectively managing retainage is critical for staying financially secure and keeping projects on track. When retainage is used on most of their contracts, construction companies are especially exposed to cash flow problems. As a result, it’s in your best interest to set procedures for tracking and managing cash flow.

Always Send Preliminary Notice to Secure Your Lien Rights

Retainage is an agreed upon portion of the contract price that’s withheld until the completion of the project. The amount of retainage is usually between 5-10% of the total contract price. The point of retainage is to safeguard against defects and ensure that contractors and subs accurately complete all the required tasks under their contracts. Retainage in construction plays a vital role in protecting project owners and ensuring quality work. However, it can also present challenges for contractors who need consistent cash flow.

Accounting for Retention Receivable & Payable: A Contractor’s Guide

Effective negotiation of retainage terms can lead to better financial management and successful project management. Yes, this will increase the contract amount for your clients, but it is an excellent approach to make sure you have enough money to work with. In some situations, this may persuade clients to forego the retainer entirely. They are virtually always only available for certain aspects of a project. Just like with Performance Bonds, the Surety vets the financial capacity of, provides the financial protection, and seeks financial recovery for the bonded contractor. Also, a Retention Bond usually includes an expiry date, so there will be no confusion as to when contractors have been released from their obligations.

• Granted, they do this to protect their cash flow, but it can leave subs in quite a bind.
• The majority of these laws were enacted to control and limit the practice, primarily to promote its ethical usage and prevent its abuse.
• With a solid process in hand, you’ll not only be able to track the numbers correctly but will keep your company in compliance with Generally Accepted Accounting Principles (GAAP).
• Retainage is a portion of the payment withheld from contractors or subcontractors to ensure that the job is completed satisfactorily.
• Accordingly, rules, requirements, and practices have been built into federal law and the laws of many states, with respect to retainage to promote its fair use and to prevent its abuse.
• CrewCost is construction-specific accounting software that streamlines company financials, so you can focus on delivering great work and winning more projects.

It wouldn’t make sense to pay more upfront than having a small percentage out of every paycheck. You are gross vs net not alone if this is the first time you hear about a retainer bond. Many contractors in Michigan are unaware of this option that can minimize the financial risk of taking a project. One of the biggest impacts ASC 606 has brought to contractors is the re-definition of contract assets and liabilities and their presentation and disclosure within the financial statements and footnotes.

• First, it’s abused to “stay ahead.”  It’s a common construction practice to underpay a contractor for work done on a job.
• Retainage is very common for various construction jobs, large and small, including public projects and private projects.
• This website and its authors assume no responsibility or liability arising from the use or interpretation of the information provided.
• Retainage is a common practice in the construction industry where a portion of a contractor’s payment is withheld until the project is completed to ensure performance and protect against potential issues.
• For instance, the percentage may be reduced from 10% to 5% when the project is halfway through.

To add to the confusion, QuickBooks (not even the Contractor version) doesn’t really handle retainage tracking automatically, like some of the more costly construction specific software. You pretty much have to “make it” track it – especially if you want your books to be accurate. This is intended to help small contractors that may have trouble getting a Interior Design Bookkeeping bond. Prevailing wage claims have priority if there are multiple claims on retainage. The information contained within this article is provided for informational purposes only and is current as of the date published. Contractors hold retention to protect the employer from receiving incomplete services and to give the contractor incentive to do a good job.

Challenges and Risks Associated with Retainage

• In Texas, contractors can send a Notice of Contractual Retainage to the property owner within 30 days of completing their contract in order to reserve the right to file a lien on the retained funds.
• Internationally, there is a huge cry to abolish retention practices in construction.
• A contractor may request that the retainage be reduced to 100% of the value of the remaining contract, realistically when at least 95% of the contract has been paid.
• The retainage payment refers to the final payment where all fees retained for the duration of a project are paid to the contractor.
• We pride ourselves on our common sense and proactive approach to handling claims.
• If you are wondering which rate to apply, I would recommend studying local and federal laws and regulations.

Retainage is a portion of a contract’s total price that is withheld until project completion. This withholding is intended to ensure that the quality of the contractor’s work is adequate. If the final inspection finds problems with the contractor’s work, the retainage will continue to be held by the client until the targeted issues have been rectified.

The use of retainage also depends on the type of project and its complexity. For example, smaller residential projects may not include retainage, while larger commercial or public projects usually do. It’s a subject of negotiation between the owner and contractor and can be determined by the contract itself. Staying on top of retainage is part of maintaining a financially healthy construction business.

With software, contractors simply set the retainage percentage once in the project, and it is applied to all invoices. Regardless of the invoicing type, you set the retention for the entire project. There is no need to calculate everything manually or enter data each time you write an invoice. Depending on the size of the contract, a retention bond may be a low-cost way to find an agreement that improves the contractor’s cash flow and satisfies their hiring party. Trade contractors use Siteline to accurately track all retainage, ensuring they never forget to bill for it.

• This way, your client will know exactly how much is being held back and why.
• In addition, it helps to track the retention on your books as an asset until the customer pays the balance.
• This post discusses the various facets of a retainer bond and why it’s a better arrangement than a retainage – especially if you are a contractor.
• Most construction contracts mandate that a certain percentage of the contract price (frequently 5% or 10%) is withheld from the contractor until the entire project is substantially completed.
• While reasonable efforts are made to ensure the information presented is accurate and up-to-date, we cannot guarantee that it is free of errors, complete, or current at all times.

Merchants Bonding Company’s Claims Department is dedicated to serving you throughout the claims process. We pride ourselves on our common sense and proactive approach to handling claims. Use our calculators to estimate the cost of construction materials for retainage vs retention your next project. While retainage has advantages, the practice is not without its challenges.