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Retainage

Retainage Definition

What is retainage? What is a retainage fee? In the contracting business, vendors define this term as a portion of the payment that is withheld until the completion of a project. The client doesn’t pay the contractor remaining payment until all work on the project is complete. It is defined the risk clients take when paying contractors. Its result is a protection for their money, time, and other resources.

Negotiate retainage upfront and represent it as a percentage of the overall cost of the project. A common withheld payment amount is 10%. This incentivizes the contractor to provide quality work up until the very end of the project. As a deal-sweetener, or for small scale projects and rushed jobs, a client may offer to forego this percentage to a familiar and reputable contractor. This definition can vary somewhat depending on industry and company focus.

Retainage Collection

Similar to accounts receivable and other forms of trade credit, an uncollected retainage receivable is essentially an interest-free loan with a cost equal to the cost of financing current assets and the time value of money.

Therefore, from the contractor’s perspective, a shorter collection period is optimal. Typical collection periods for retainage accounts receivable can be as long as 6 months or as short as 45 days. If you want to be very efficient, then consistently collect the withheld amount from clients within 90 days of project completion. A reduction is surely needed if collection occurs beyond the marker of 6 months.

Collection Hurdles

Typically there are three steps to complete before the contractor can collect retainage. These three steps are: completing the punch list, putting together the close-out package, and submitting this invoice.

Define a punch list as a list of minor details and leftover items related to the project. The bulk of the project may be complete, but small tasks may remain unfinished. For instance, a punch list may include an unpainted portion of a ceiling, faulty wiring for a light bulb, or a problem with plumbing. The client will not pay the retainage until these minor items have been taken care of, so this is an important step to complete in speeding up collections.

The close-out package is a collection of documents related to the project. Some clients, especially in the medical field, expect a close-out package prior to paying retainage. The close-out package consists of copies of legal documents, liens, warranties, certificate of occupancy, test results, operations and maintenance manuals, and other relevant paperwork and documentation. Gather these documents and send them to the client in a timely manner to ensure prompt payment of retainage.

And finally, it is important to submit the retainage invoice to the client as soon as possible after all other necessary steps have been completed. Prior to submitting the invoice, finalize all subcontractor pricing.

Three Steps for Retainage Collection

1. Complete the punch list
2. Assemble the close-out package
3. Mail the retainage invoice

Complications

Certain matters can complicate retainage negotiations, retainage collection, and retainage release. These issues can arise from change orders and arrangements with subcontractors.

Often, over the course of a contracted project, the client will request changes deviating from the original project plans. For instance, in a construction project the client may request to move a wall, alter or relocate windows or doorways, or add or change other features. These change orders inevitably add to the cost of the project as a whole and change the amount withheld.

Getting pricing in from all subcontractors on additional work can be difficult. A project manager must rely on subcontractors to submit pricing in a timely manner so that they can generate the final progress billing and retainage billing. Oftentimes, pricing can snowball at the end of a project.

A dedicated project manager will be pro-active with regards to pricing from subcontractors. So that he may invoice the retainage as soon as possible after they complete the project.

Retainage bonds further confuse the matter, with needs varying by location and governing body. Generally, file some kinds of retainage bond with the local municipality. Amounts and requirements are subject to the preferences of local government. Make sure to consult an expert when filing for any type of payment bond.


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retainage

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retainage

See Also:
Progress Billing for a General Contractor
How to Maintain an Effective Job Schedule
Work in Progress
How to manage inventory
Trade Credit

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Progress Billing for a General Contractor

Progress Billing for a General Contractor Definition

A construction project typically involves many different trades in order to reach completion. Therefore, it can be just as daunting a task to submit for payment to a client along the way. The Owner of a construction project relies on the project architect, lender and sometimes a third party inspection company to make certain that payment is applied for correctly and within reason. Once the progress billing for a general contractor definition is truly understood, you will smoothly pass through the steps of preparing and submitting everything needed to complete a construction project.

Start the project with a plan to be profitable. Price for profit at the beginning to prevent any cash flow crunches during the completion of the project. 

Start With a Good Schedule of Values

A schedule of values is a list with the dollar amount assigned to each area of work to complete on a construction project. A construction project is broken out by each scope of work and typically separated according to the Construction Specifications Institute Divisions (CSI). Therefore, it is best to separate a project’s Schedule of Values into basic CSI divisions. Examples of these divisions are General Conditions, Sitework, Utilities, Concrete, Steel, etc. Once you define the areas of the scope of work, then a assign corresponding value to each one. Also, establish a percentage complete for each item as you make progress on the project. In the United States the industry standard format for a billing schedule of values is per AIA form G703. Progress billing for a general contractor accounting issues are common, so it is essential to establish a good schedule of values early.

Establish the Rate of Construction Retainage

A construction contract will typically require that “Retainage” be withheld from each application for payment in order to provide the Owner or lender protection from the Contractor not completing the entire project. You may withhold 5% or 10% from each payment to the Contractor. Hold the funds in reserve until you complete the project punch list at the end of the project. Therefore, each progress billing must take this retainage amount into account on each line item of the schedule of values and ultimately on the bottom line of the application.

Establish the Frequency of Progress Payments

A progress billing is exactly that, a billing that progresses towards completion a percentage at a time. Therefore, it is necessary to establish the frequency that you shall submit each application. Often times, a progress billing will be submitted to an Owner or Lender once per month; complicated projects may require more frequency. A progress billing must specify the current period percentage of completion and the cumulative total. Do this for both the individual items and the total.

Establish the Percentage of Completion

Vendors will submit their invoices for payment to a contractor for the amount of work that they have completed over the period. A contractor must confirm the completion of the work according to this percentage. Then the contractor should include the corresponding amount within the progress billing to the Owner or Lender. Perform this process for each scope of work. Then total all completed items percentages.

Submit It Correctly Then Get PAID

Progress billings are often rejected by an Owner or Lender. They reject it because of a variety of issues. Some of these issues include incorrect completion percentages, incorrect math, or applications submitted tardy. In order to achieve profitable progress billing revenue recognition, effective processing is important. Be sure to review vendor invoices and percentage completions with field supervision to avoid over/under billings. Also, be certain to double check math calculations or use construction software to avoid rejected payment applications due to math mistakes. Finally, submit your progress billing forms on time! This is an easy way to get credit with an Owner or Lender because it gives them ample time to review the application.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step guide to maximizing your profits on each sale. Get it here!)

Progress Billing for a General Contractor Sample

UNCONDITIONAL FINAL WAIVER AND RELEASE OF LIENS AND CLAIMS

OWNER: Business X, LLC.

PROJECT NAME: PRIORITY MANAGEMENT

For and in exchange of the sum of $                                , the sufficiency of which is hereby acknowledged, the undersigned Contractor, subcontractor, consultant, materialmen or laborer (hereinafter the “Undersigned”) warrants and represents as follows:

(1) The Undersigned has been employed by Business X, LLC. to furnish labor, materials, or services in connection with the construction of improvements on or to the above referenced project.

(2) The Undersigned has performed all labor, materials, or services required under its Contract, Subcontract or Purchase Order in full compliance with all terms and conditions thereof, and all applicable plans and specifications.

(3) Any and all contractors, subcontractors, laborers, suppliers and materialmen that have provided labor, material, or other services to the Undersigned for use or incorporation into the construction of the improvements to the Project have been paid in full for all amounts due and owing to them on the Project, or shall be promptly paid in full from the proceeds of the payment referenced above and there are no outstanding claims of any character arising out of or related to the Undersigned’s activities on or improvements to the Project. If the Prime Contractor signs this Waiver, then attached hereto as Exhibit A is a complete list of all subcontractors and suppliers retained by such party as of the date of this Waiver.

(4) The Undersigned waives and releases any and all liens, lien rights, claims of liens, and any other claims for payment for labor, material or equipment of any type or description that it may have against the Owner, the Owner’s Project Manager, the Owner’s Engineering Consultant, the Architect for the Project, the Prime Contractor (if this Waiver is signed by a subcontractor or supplier) and/or any person with a legal or equitable interest in Project, arising out of or in any fashion related to, any labor, materials or services furnished by, through or under the Undersigned on, or used in connection with, the Project, without exception.

(5) This Final Waiver and Release constitutes a representation by the Person signing this document, for and on behalf of the Undersigned, that the payment referenced above constitutes full and complete payment for all work performed and costs or expense incurred (including, but not limited to, costs for supervision, field office overhead, home office overhead, interest on capital, profit and general conditions cost) by, through or under the Undersigned relative to the work of improvements at the Project, including all retainage.

More specifically, the Undersigned hereby waives, quitclaims, and releases any claim of damages due to delay, hindrance, interference, acceleration, inefficiencies or extra work, or any other claims of any kind it may have against the Prime Contractor (if this Waiver is signed by a subcontractor or supplier), the Owner, the Owner’s Project Manager, the Owner’s Engineering Consultant, the Architect for the Project, and/or any other person or entity with legal or equitable interest in the Project.

IN WITNESS WHEROF, the person signing this document, acting for or on behalf of the Undersigned and all of its employees, subcontractors, laborers, suppliers and materialmen, executes this document this         day of                               , 20          .

By:                                                                       

Title:                                                                     

This instrument was executed and acknowledged before me on this        day of                          , 20     , by                                                      , on behalf of said entity.

Notary Public

                                                                          

(Notary Seal)

My Commission Expires: 

Improve Profitability

Progress billing is an important factor that can impact a company’s profitability. Price it right the first time! If you are uncertain of whether you have a pricing problem, download the free Pricing for Profit Inspection Guide and fix it.

progress billing for a general contractor

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

progress billing for a general contractor

See Also:
Progress Billing Example
How to Maintain an Effective Job Schedule
Retainage Management and Collection
Construction Accounting
Work in Progress
Trade Credit

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