During construction, the construction contract governs the project. This document is a written record of the agreements between the customer, contractor, and subcontractor. The contract specifies the materials to be used, the timeline for completion, and the construction method and payment date.
Customers may withhold a small amount of money until the work is completed in payment terms. This withholding is called retention, which becomes important in construction.
Define Retainage
A retainage is a portion of a contractor’s fee that is withheld until the project is completed or specified in the contract.
In essence, retainage ensures that contractors and subcontractors fulfill their contractual obligations in a satisfactory manner. In the absence of retainage, a customer might pay an untrustworthy contractor their full fee upfront, at which point they might abscond with the money and abandon the project. A retainage serves as a reverse security deposit for the customer.
Retainage Workflow
A retainage percentage of between 5 and 10 percent is generally agreed upon by the parties before the start of the project, and stipulated in the contract. As the construction project progresses, progress payments are made periodically as fractions of the full fee.
An example of a retainage calculation would be $100,000 if the project price is $100,000, along with a 10 percent retainage. Each progress payment is subject to a 10 percent retainage by the customer or project owner. Each progress payment of $100,000 stipulated in the contract will be withheld by $10,000 by the customer.
Define Substantial Competition
As defined in the contract documents, substantial completion occurs when the work or a designated portion of the work is sufficiently completed so that the owner can occupy or use it as intended. A property has been substantially completed when the owner is able to move in or use it for its intended purpose, and retainage to the contractor is likely due.
Merits of Retainage
Financial Security
Money held in retainage allows the owner to preserve some funds that might have otherwise been wasted on an incomplete project when a contractor or subcontractor fails to perform their obligations. This money can now be used by the owner to hire another contractor to finish the project.
Proper Incentive
Construction contractors and subcontractors will be motivated to perform their work well if a significant part of the overall project fee is not released until the structure is usable.
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