If there are 5 progress payments of $100,000 stipulated in the contract, the customer will withhold $10,000 from each. Things can go wrong, things can go right — the timeline, and whatever contingencies need to be met for completion, can shift over time. As such, a customer entering into a construction contract with a developer or contractor must retain certain assurances that work is completed satisfactorily. On top of that, the margins in the construction industry are notoriously slim. Subcontractors and other down-the-chain participants have gripes about retainage – with good reason.
Retention Billing
Kelsie holds a Masters of Business Administration (MBA) and has close to a decade of experience in construction accounting and finance. One might enjoy preserving or else maintain retention subject only to necessary use consistent with any conditions imposed as Accounting Periods and Methods established either by contract or between agencies involved. Other states will require immediate release of funds if the retainage is more than 10 percent on a $100,000 project or 5 percent on a project at $500,000 or more. It involves referring the dispute to an impartial third party, known as an arbitrator, who reviews the evidence and arguments presented by both parties and renders a binding decision. This decision is generally enforceable by law and can provide a quicker resolution compared to a lawsuit. Make sure your payout percentage is specified in the agreement if you wish to get it on time.
Retention bonds can help you get paid faster
Each state, however, does have different regulations about the amounts that can be withheld, the length of withholding, and the process for recovery. When abuses happen or someone engages in retention practices that run afoul of the limitations, the state laws will usually provide punishments (in the form of interest penalties). As the project progresses, the retainage percentage affects the payment schedule.
Understanding Retainage
The average amount of retainage withheld on private jobs is 7.59%, on state jobs is 5.56%, and on federal jobs is 3.26%, with higher percentages withheld from subcontractors than from general contractors. A construction project’s retainage is set by the construction contract between the parties, in which both sides agree to some percentage withheld from each progress payment. Retention billing involves the process of documenting and invoicing retainage in construction the retained and payable amounts.
- With LetsBuild construction management software, you can see your project in real-time and work with a single source of truth.
- This creates cash flow challenges in an already cash-poor industry, the practice is too frequently abused, and of course, it’s subject to complicated regulations that make it tricky to execute.
- By clearly defining these terms, both parties can have a mutual understanding of their respective rights and responsibilities.
- It also functions as a means to address any deficiencies or issues that may arise during the project, providing the owner with a source of funds to rectify any problems.
Retention Payable
The retainage fees are not taxable until the project is complete and you have received the payment. When filing with the IRS, you need to note to exclude these funds if they have not been paid. To navigate retainage successfully requires more than just a calculator and contract—it demands careful planning, clear communication, and mutual trust between contractor and owner. With all these moving Partnership Accounting parts, mastering the intricacies of retainage can be the difference between a project that runs smoothly and one that leaves everyone scrambling at the finish line.
Retention Amount
For both contractors and project owners, it’s essential to know the local laws to avoid headaches down the line. Both project owners and contractors should maintain comprehensive and organized documentation throughout the retainage process. This includes recording all communication, submitting necessary paperwork promptly, and keeping track of contract milestones and completion requirements.