Everything You Need To Know About Retainage

The cash flow in any business is the key to keeping the process going. In the construction industry, retainage is the term, contractors use to describe this cash flow system. It is quite misunderstood at times. However, if we simply define the term, it will be as the amount that client or contractor holds for a while in the assurance of getting the project done satisfactorily. Some people think that the contractor tricks the client this way to get an extra 10% off from them. But it is not true. It is the surety amount that one party holds for some time. and the purpose of doing so is to get the project on time. After the successful delivery of the project, the contractor gets full payment. The only risky thing is commitment. You can eliminate this risk by signing a contract and having terms and conditions.

Being a construction contractor, you need to know about the basics of retainage so that you can not be tricked by clients or other subcontractors like heavy equipment dealers. In this article, you will know about some tricky facts about retainage.

• Withholding from payment

Sometimes the contractors think that the client deducts the amount of the total budget which will be affecting their profit margin. However, the client deducts only 10% of the amount from the total budget and keeps it on hold for some time. At the end of the project, they release the amount based on their commitment. However, it is necessary to make a necessary sign before starting the project.

• Retainage is negotiable

The process of retainage is not something you cannot negotiate on. It actually, builds on the contract between two parties. When you are closing the deal or contract, you set some terms and conditions with mutual understanding. Retainage is the part of that contract that is set on mutual agreement as well. hence, both parties can make a mutual decision on the percentage and time of retained amount. 

• Retention bond

The retention bond is like an insurance bond that two parties sign on mutual understanding. The amount, percentage, and time of the retainage are set on mutual agreement that can be protected by a bond. This bond has some legislative regulatory clause to protect its creditability. This way, the contractor and client both are on the safe side. Whereas some bonds help the contractor t get the retainage faster than the verbal commitment.

The bottom line

In the construction industry, the cash flow keeps running among different subcontractors like heavy equipment dealers and suppliers. The retainage is the amount that is being held by the client towards the contractor for some time. The retainage aims to get the project on time. The client normally releases the amount after the satisfactory delivery of the project. In this article, you may know about a few basic things about retainage so that you can be safe and no one can trick you including clients or subcontractors in the future.