If you’re a construction company owner, you’ve probably heard of the term “retainage” before. But what exactly is it? Retainage refers to the percentage of payment that is withheld by the project owner or general contractor from the subcontractor or supplier until the project is completed. Retainage is intended to ensure that the subcontractor or supplier will complete their work properly and within the agreed-upon timeframe. However, retainage can also have negative effects on a construction business. In this blog post, we’ll discuss what retainage is, how it affects construction companies, and some strategies to manage it effectively.
The Effects of Retainage on Construction Companies
Retainage can have a significant impact on cash flow for construction companies. While contracts typically outline the percentage of retainage, they don’t often detail when that money is due. It’s not uncommon for a construction company to wait months or even years to receive their retainage payment. This can create financial strain and limit the ability of contractors to take on new projects. Additionally, waiting for retainage payments can cause a rift in relationships between contractors and project owners, leading to potential negative effects down the road.
Strategies to Manage Retainage
One strategy is to negotiate the retainage percentage upfront during the contract discussions. Construction companies can aim for a lower percentage of retainage while still assuring project owners that they will finish the project on time and to their standards. Another strategy is to include an “accelerated payment” clause in the contract, which would require project owners to pay retainage earlier in the project timeline. Finally, construction companies can also consider factoring or financing their retainage payments through a third-party provider that can provide funds up front. This allows the construction company to receive the money they’re owed quickly, without continuing to wait for payments from project owners.
Retention Alternatives
One way to avoid retainage entirely is to use a payment bond instead. Payment bonds are issued by a surety company and function as a guarantee that the contractor will pay all suppliers, subcontractors, and vendors involved in the project. This means that there is no need for withholdings or retainage, as the surety bond acts as a guarantee of payment.
The Legal Issues of Retainage
Retainage is heavily regulated and has specific requirements by state regulation. As such, it’s important to ensure compliance with the law when managing retainage. Failure to comply can result in legal issues, including lawsuits, fines, or even forfeiting entitlement to retainage payments.
Conclusion
Retainage is an essential aspect of construction projects, but it’s important to understand how it can impact a construction business. By negotiating retainage upfront, including accelerated payment clauses, or exploring factoring and financing options, contractors can mitigate the negative effects of retainage. The use of payment bonds can eliminate the need for retainage entirely. By carefully managing retainage, construction companies can ensure that they have the cash flow they need to take on new projects and maintain positive relationships with project owners.
Don’t let retainage hold your project hostage. If you have plumbing needs for your new construction or renovation project, contact Cedar Park Plumbing today.