How to Calculate Retainage in Construction
Retainage, also known as retention, is a common practice in the construction industry where a certain percentage of the payment is withheld by the owner or contractor until the project is completed. It serves as a form of security to ensure that the contractor fulfills all contractual obligations, including the rectification of any defects or deficiencies. Calculating retainage is crucial for both parties involved in a construction project to have a clear understanding of the payment terms and conditions. Here is a step-by-step guide on how to calculate retainage in construction:
1. Determine the contract amount: Start by identifying the total value of the contract, which is the agreed-upon sum for completing the project.
2. Establish the retainage percentage: Retainage percentages can vary from project to project, but commonly range from 5% to 10% of the contract amount. Check the contract documents or discuss with the owner or contractor to determine the agreed-upon percentage.
3. Calculate the retainage amount: Multiply the contract amount by the retainage percentage. For example, if the contract amount is $100,000 and the retainage percentage is 5%, the retainage amount would be $5,000.
4. Monitor progress payments: Throughout the project, track the progress payments made by the owner or contractor. Deduct the retainage amount from each payment. For instance, if a progress payment of $20,000 is due, subtract $5,000 for retainage, resulting in a payment of $15,000.
5. Release of retainage: Retainage is typically released upon completion and acceptance of the project or specific milestones. Ensure that all contractual obligations have been fulfilled before requesting the release of retainage.
FAQs about Retainage in Construction:
1. What is the purpose of retainage?
Retainage serves as a security measure to ensure the completion of a construction project and the resolution of any defects.
2. Who holds retainage in construction projects?
Retainage is usually held by the owner or contractor, depending on the contract terms.
3. Is retainage negotiable?
The retainage percentage can be negotiated between the parties involved in the construction project.
4. Can retainage be released early?
In some cases, retainage may be released early if agreed upon by both parties or upon completion of specific project milestones.
5. Is retainage subject to interest?
Retainage is not typically subject to interest unless specified in the contract.
6. What happens if there are defects or deficiencies in the project?
The retainage amount can be used to rectify any defects or deficiencies before it is released.
7. Can retainage be withheld indefinitely?
Retainage cannot be withheld indefinitely. There are usually contractual terms that specify the timeline for its release.
Calculating retainage in construction is essential for maintaining a fair and transparent payment process. By understanding the steps involved and addressing common FAQs, both owners and contractors can effectively manage retainage and ensure successful project completion.