When retainage is used on most of their contracts, construction companies are especially exposed to cash flow problems. As a result, it’s in your best interest to set procedures for tracking and managing cash flow. Retainer protects clients and provides a financial incentive for contractors when used effectively. While retainage can give you little to no influence over receiving full payment for your completed work, this is not always the retention vs retainage case. Before the project begins, both the client and the contractor must agree on the amount of retainage. Sound contracts and well-stated milestone requirements help retainage.
In addition, the same contract has a provision for negotiating variable retainage. Variable retainage can mean that withheld amounts are reduced over the length of the contract, or even paid out entirely once the contractor’s portion of work is complete. Or it could mean that a different rate applies to labor and materials. This can help contractors cover up-front costs due for construction materials, where margins are lower. In other states, the normal practice is that no more can be withheld after 50% of the project has been completed.
In Iowa, a contractor may request the early release of retainage on a public project. There is a defects liability period clause – a period of 3-12 months after the reference date of the final payment or the date specified in the construction contract. During this time, a building expert inspects the property and assesses the quality of the contractor’s work. They determine if any defects need to be improved before final payment is made. Withdrawing retainage in construction is not forbidden in Australia, so owners have all rights to withhold retention.
Subcontractors face more difficulties with retention than contractors. They are virtually always only available for certain aspects of a project. With a proper dispute resolution clause in place, contractors, subs, and suppliers can avoid taking their disputes into litigation. A retention bond might be secured at the beginning of the project in order to stave off retainage from the outset. However, a retention bond might also be introduced later on in a project in order to get ahold of retainage that’s been building up. To add to the confusion, QuickBooks (not even the Contractor version) doesn’t really handle retainage tracking automatically, like some of the more costly construction specific software.
By adhering to these best practices, all parties can ensure that the process is fair, transparent, and conducive to the successful completion of the project. Note that retainage may be used interchangeably with retention or progress payment when referring to money recording transactions withheld on construction contracts. The concept of retainage is meant to balance the needs of contractors and their clients.
When an invoice from your vendor is recorded, the retention will go to this account, with the balance going to Accounts Payable. Retention payments reduce risk for owners by ensuring contractors meet their contractual obligations. They also reduce risk for primary contractors who rely on subcontractors and suppliers. With the right software, you can automate key tasks like tracking payments, creating invoices, and ensuring that retainage terms are followed https://www.bookstime.com/ according to the contract.
