Retainage: A Complete Guide for Subcontractors

Construction retainage (or retention) is that familiar sting every subcontractor knows— that chunk of your hard-earned payment getting held back as a “just in case.” While it might feel like the general contractor (GC) is playing keep-away with your money, there’s actually a method to this practice. 

Understanding how retainage works, and how to protect yourself within the system, can mean the difference between healthy cash flow and sleepless nights wondering when you’ll get your money.

In this construction retainage guide, we’ll answer questions like:

• What is retainage?
• What is the purpose of retainage?
• How does retainage impact subcontractor cash flow?
• What are some tips for dealing with retainage?
• How can subs collect retainage payments faster?

The Basics of Construction Retainage

Let’s start with the basic retainage definition and work from there.

What is retainage in construction?

Retainage is a long-standing construction payment policy that allows project owners and GCs to hold back part of the money you’ve earned until the project is complete. To illustrate the retainage meaning, think of it this way: it’s basically like working for a 40-hour paycheck every week, but only getting paid for 30 because your boss is holding the rest of it until everyone finishes their work—that’s the meaning of retainage.

What is retainage in accounting terms? It's essentially an accounts receivable that sits on your books for months or even years, tying up capital you need for operations.

Why does retainage exist?

Retainage construction practices started in the 1840s to prevent laborers from either not completing or poorly finishing projects. It quickly became a widely adopted way of reducing property owners’ risks and incentivizing higher-quality work. 

How much money can be withheld for retainage?

It’s typically a percentage (5-10% on average) of the total contract value. Retainage rates tend to be higher on private construction projects and lower on federal, state, and municipal projects.

How long can retainage be held?

Retainage terms typically allow payers to hold retainage until the end of the project or until a certain percentage of work is finished.

What is variable retainage?

Sometimes retainage is variable, meaning it changes depending on details defined in the contract. This can work in a couple of different ways: 

1. The withholding rate reduces over time. For example, the retainage could start at 10% during the first three billing periods and then 7.5% during the next three. 
2. A different retention rate is applied to different line items. For example, a GC might not hold any retention on equipment rentals, or the retention rate could be higher on materials than on labor.

How does retainage work in construction?

The best way to understand construction retainage is to see it in practice. Here are two common scenarios:

Example 1: Fixed Retainage on Monthly Billing

Say you’re working on a $100,000 project, and the retention rate is 10%. So, the total retainage will equal $10,000. But retainage will be withheld from each progress payment. 

Let’s break it down:

• If your portion of the project will take four months and the progress billing schedule lets you bill monthly, you’ll theoretically complete (and bill for) 25% of the project each month.
• So, for each progress payment, you’ll bill $25,000. 
• The GC will hold $2,500 from every progress payment they issue. 
• Across the four payments, they’ll withhold a total of $10,000. 

Example 2: Variable Retainage With Early Release

Let’s pretend you’re working on a $200,000 electrical subcontract with variable retainage terms. The contract specifies 10% retainage for the first 50% of work, then 5% for the remainder.

Here’s how it works:

• During the first half of the project, you bill $100,000 over several months, and the GC withholds 10% ($10,000).
• During the second half of the project, you bill the remaining $100,000 over however many months, and the GC withholds 5% ($5,000).
• At substantial completion, you receive the full $15,000 retainage payment.

Of the two approaches, variable retainage with early release can help improve your cash flow as the project progresses while still providing the GC with the security they need. We’ll touch on negotiation tactics a bit more later.

How Retainage Affects Subcontractors

While retainage affects everyone in construction, subcontractors feel the brunt of the impact because they’re at the bottom of the payment chain. You’re still paying suppliers and workers their full amounts upfront, essentially financing the entire job.

Additionally, GCs often impose higher retention rates on subcontractors than what they’re held to in their prime contracts. For instance, a GC might only have 5% withheld from them, but then turn around and withhold 8% or 10% from their subcontractors. Granted, they do this to protect their cash flow, but it can leave subs in quite a bind.

Retainage creates crippling cash flow issues.

Profit margins on construction projects are already thin, sometimes running as low as 5-10%. Retainage rates can easily equal (or surpass) the entire project’s profit margin.

This means that subs have to wait until a project is finished before making a dime of profit. In cases where retainage exceeds the profit margin, progress payments might not even be enough to cover labor and material costs. 

Here's what this actually looks like in dollars and cents for a typical subcontractor.

Retainage can be withheld for years.

On top of that, it can take years for subcontractors to receive their retainage payments. During my talk at CFMA Annual 2025, one attendee mentioned they’ve been waiting on a retainage payment since 2022. Though I don’t know the specifics of their situation, the reason for these delays is often because the prime contract states that retainage will be paid until the project is 100% done, even if that’s long after you’ve finished your part.

Think about it: If you run an excavating company, your team is involved very early on in the project. Once you’ve finished your part, you still have to wait for framing, HVAC, plumbing, electrical, installation, drywall, and finishing subs to complete their work. 

Even after the project is finished, inspected, and approved, it can be 30, 60, or 90 days (depending on state laws) before the GC receives its retainage and, in turn, pays you. What’s worse is that subs may never receive their retention payments if the owner or GC goes bankrupt or out of business.

4 Tips to Help Subcontractors Deal with Retainage

Retainage isn’t going away any time soon. To keep your company out of trouble, here are four tips to help subcontractors deal with retainage. 

1. Closely read the terms of every contract.

Always understand what your company is getting into. Retainage percentage and parameters must be defined in your contract. Look specifically for details like:

• How much retainage will be withheld? 
• When will retainage be released? 
• What are the stipulations to receive your retainage? 

Pro tip: Ask to see the prime contract terms upfront. When you know what retainage rate the GC is dealing with, you have better leverage to negotiate fair terms for yourself.

2. You have a right to negotiate.

It’s not likely that you’ll get a GC to completely remove the retainage clause. But you might get them to approve more favorable terms, especially if you have a previous relationship with them or a good reputation in the industry. 

Retainage details you may be able to negotiate include:

• Reducing retainage withholding percentage
• Adjusting how long retainage will be withheld, or securing milestone retainage releases (e.g., getting 50% of your retainage at substantial completion rather than waiting for final)
• Considering retention bonds or surety bonds as an alternative
• Getting retainage placed in an escrow account that you earn interest on

3. Brush up on retainage laws.

Retainage laws vary from state to state and can sometimes conflict with federal legislation. 

For instance, New Mexico completely prohibits retainage. Texas, on the other hand, mandates it. Additionally, most states have specific restrictions on the amount of retainage that can be withheld, the duration of the withholding, and the types of projects it applies to. 

It’s essential to know the retainage laws in your state. If the contract isn’t written according to law, it won’t stand up in court. 

4. Plan cash flow needs ahead of time.

The best way to deal with retainage is to acknowledge how it affects your cash flow and plan proactively. This means implementing good accounting practices and having access to working capital that can float projects until they’re finished.

These tips can help maintain positive cash flow:

• Accurately estimate project costs.
• Closely monitor these estimates throughout the project’s duration.
• Bid higher to help offset retainage.
• Consider financing materials. 
• Obtain access to lines of credit.
• Put financial reporting in place.

How to Collect Retainage Payments Faster

It would be nice if every GC issued retention payments as soon as they were due. But that’s not always the case. Some GCs will look for every opportunity—missing paperwork, incomplete documentation, contract technicalities—to hold retainage for as long as possible. To prevent this from happening with your retainage payments, we recommend the following:

Prepare to close out from the beginning.

Make it a best practice to prepare for project closeout throughout the job. You can’t get paid until you provide all of your close-out documents. So it’s important to know what documents will be required from the start. Collect them in a folder so you know where to find everything at the end of the project.

Submit accurate pay apps on time.

The first step to getting your retainage payment is to submit your final payment application accurately and on time. Ensure that you provide all the necessary paperwork and details correctly, as any missing or incorrect information may lead to GCs rejecting your pay app.

Stay on top of lien waivers.

Your final pay app should include conditional final lien waivers from your company and any lower-tier subs and vendors. Failure to provide the correct lien waiver may result in the GC withholding your retainage. 

Remember not to submit your unconditional final lien waiver until after you’ve received your retainage. 

If there’s anything else you’re unsure about when it comes to lien waivers, we have a guide and a webinar dedicated to the topic!

Follow up on invoices.

Some subs submit the final pay app and just wait to get their retainage. We strongly encourage you to take a more proactive approach. Treat retention payments like any other payment you’re trying to collect.

• When the retainage due date is approaching, send an invoice to the GC.
• Follow up to make sure they received your notice. (Email reminders can be effective, but don’t hesitate to pick up the phone.)
• Send regular, past-due reminders (shortly before the due date, just after the due date, and every ten days or two weeks following).

If you don’t receive your retainage payment in a reasonable time, send a demand letter. This formal document is commonly the first legal step to take to resolve a dispute. Here’s a demand letter template you can download and customize. 

Don’t forget your lien rights.

If you’ve already sent reminders for unpaid invoices to the GC, and they’re still unresponsive, consider sending them a notice of your intent to file a mechanic’s lien. If they still don’t send your payment, filing the lien is your last resort. However, timing can be tricky here. Most states require you to file a lien within 30 to 120 days of completing work on a project. Plus, in order to establish your lien rights, you must first file a preliminary notice. If the project isn’t going to be finished until six months after you finish your portion, your retention payment may not be due until long after your lien rights expire. 

In these cases, it’s important to take into account the payment history and reputation of both the GC and the owner of the project. Evaluate your risk of non-payment on a case-by-case basis, and don’t hesitate to exercise your lien rights when needed.  

Track Your Retainage Payments

Staying on top of retainage is part of maintaining a financially healthy construction business. 

Trade contractors use Siteline to accurately track all retainage, ensuring they never forget to bill for it. Plus, with Siteline, you can store all of your documents required for close out, generate and submit accurate and on-time pay apps, and submit the correct lien waivers for the stage of project and phase of billing.

If tracking and billing for retainage is an ongoing issue at your company, see how Siteline can help. Schedule a demo today.