Construction retainage, also called retention in some markets, is money withheld from an otherwise earned progress payment. It is intended to support completion or correction obligations, but the percentage, calculation base, permitted reasons, reduction, release date, and notice requirements depend on the agreement and governing law.
Do not assume that a familiar percentage is automatically lawful or required. For example, the U.S. Federal Acquisition Regulation rule cited below addresses federal construction contracts and says retainage decisions are case-specific; it is not a universal rule for private, state, or international projects.
Retainage calculation
How does 5% retainage affect the current payment?
The example calculates the current and cumulative withheld amount from approved work under a stated 5% contract assumption.
| Measure | Calculation | Amount |
|---|---|---|
| Prior approved work | $110,000 | $110,000 |
| Prior retainage | $110,000 × 5% | $5,500 |
| Current approved work | $40,000 | $40,000 |
| Current retainage | $40,000 × 5% | $2,000 |
| Current net request | $40,000 − $2,000 | $38,000 |
| Cumulative retainage | $150,000 × 5% | $7,500 |
Where does retainage appear in construction billing?
A payment application normally reports the value of work completed and eligible stored materials, then subtracts retainage to show earned payment after withholding. The application may use one percentage for completed work and another for stored materials if the contract permits. The retained amount remains visible as part of the project balance until it is released or adjusted.
The owner may withhold retainage from the prime contractor, and the prime contractor may apply corresponding terms to subcontractors only as their agreements and law permit. Each tier needs a controlled ledger showing gross earned value, retainage withheld, retainage released, other authorized deductions, and net payment.
- Gross earned work and stored-material value
- Contractual retainage percentage and calculation base
- Cumulative retainage withheld and released
- Net certified amount and remaining balance
Worked retainage calculation
Assume prior approved work was $110,000 with 5% retainage, so prior earned payment after retainage was $104,500. During the current period, another $40,000 of work is approved. Applying the same 5% rate to the new work withholds another $2,000 and creates a current earned payment of $38,000.
Cumulative approved work is now $150,000. Cumulative retainage is $7,500 and cumulative earned payment after retainage is $142,500. Subtracting prior payments of $104,500 produces the $38,000 current request. This example excludes stored materials, tax, change orders, disputed work, and any authorized retainage reduction.
- Prior net earned: $110,000 − 5% = $104,500
- Current retainage: $40,000 × 5% = $2,000
- Current net request: $40,000 − $2,000 = $38,000
- Cumulative retained: $150,000 × 5% = $7,500
When can retainage change or be released?
The contract may reduce retainage after substantial completion, release it by phase, or hold part until final completion, correction of deficiencies, closeout documents, consent of surety, or another stated condition. Statutes can impose additional limits or deadlines. Record the specific condition rather than using a vague note such as payable later.
When retainage is released, show both the prior retained balance and the amount released so the transaction is auditable. A release does not erase the earlier history. If only part is released, identify the work, party, phase, and authority for the adjustment and preserve the approval with the payment record.
- Substantial or final completion milestone
- Punch-list and closeout-document status
- Contractual or statutory release deadline
- Written approval for partial or full release
How should retainage records be checked?
Recalculate retainage by schedule-of-values line when different rates or exclusions apply. Check whether stored materials, completed phases, approved changes, taxes, or other amounts belong in the base. Compare the current cumulative amount with every prior application and the accounting ledger before certifying a payment.
Keep the signed contract, amendments, applications, continuation sheets, certificates, deduction notices, completion evidence, releases, and payments together. Pocket Invoice can document an approved amount due on a general invoice, but it does not determine whether retainage is permitted or replace a required construction payment form.
- Apply the rate to the correct contractual base
- Reconcile every tier and prior billing period
- Record reasons and authority for adjustments
- Preserve release evidence with the final payment
Official sources
These references support the regulatory information in this guide. Check the current page before making a decision.
- Federal Acquisition Regulation 32.103: Construction Progress PaymentsExplains when retainage may be used on construction progress payments and why it should not be applied routinely.
- AIA Contract Documents: How to Complete the G702 Payment ApplicationShows how retainage, previous payments, completed work, and the current amount due appear on the standard G702 payment application.
Frequently asked questions
Questions about how does construction retainage work?
Is 10% retainage required on every construction project?
No. Rates and limits depend on the contract and governing law. The federal rule discussed in this guide applies to its stated federal context, not every project.
Is retainage calculated on stored materials?
It depends on the contract, payment form, and applicable rules. The billing record should show the selected base and rate rather than combining unlike amounts without explanation.
How is released retainage shown?
Show the opening retained balance, release authorized for the period, remaining retainage, and resulting payment. Keep the approval and completion evidence with the record.