Retainage
Retainage is a portion of each construction payment, usually a set percentage, that the owner or lender holds back until a project or phase is complete. It gives the contractor a financial reason to finish the work, fix defects and deliver closeout documents before receiving the final payment.
How to calculate retainage
Retainage held = Payment amount × Retainage percentage
Example: A contractor bills $400,000 for work completed this month under a contract with 10 percent retainage. The owner pays $360,000 and holds back $40,000. The retained amounts build up over the project and are released once the work is complete and accepted.
Why retainage matters
Retainage protects the owner and the lender against unfinished or defective work. Holding back part of every payment keeps money available to finish the project or correct problems if the contractor walks away.
Lenders track retainage closely on construction loans. The amount held back is still a cost of the project, so the budget must show it as owed, and the lender releases it only after completion requirements such as final inspections and lien waivers are met.
Retainage terms vary. Each contract sets the percentage and release conditions, and some states set limits on how much can be held back.
Retainage vs. Lender Holdback
Retainage is held back from each payment to a contractor. A lender holdback is a portion of the loan itself that the lender keeps back until a condition is met, such as a leasing threshold or the completion of a repair. Both withhold money until work is done, but they apply at different levels of the deal.
How Smart Capital Center handles retainage
Smart Capital Center's AI agents track retainage on every draw, keep a running balance of amounts held back by contractor and budget line, and check release conditions before the final payment goes out.
Frequently asked questions
What is a typical retainage percentage?
Retainage is often set at 5 to 10 percent of each payment, though the exact figure depends on the contract, the lender and any state rules that apply. Some contracts reduce the percentage once the project reaches a milestone, such as 50 percent completion.
When is retainage released?
Retainage is usually released at substantial or final completion, once the work has been inspected and accepted, punch list items are finished, and final lien waivers are in hand. Some contracts release retainage in stages as individual phases or trades finish their work.
Is retainage included in the construction budget?
Yes. Retainage is part of the cost of the work, even though payment is delayed. Construction budgets and draw reports usually show it as a separate running total, so the lender can see how much is owed to contractors and confirm enough loan funds remain to pay it.