What Is Retainage in Construction?
Retainage is the part of each progress payment on a construction project that the owner holds back until the work is substantially complete, usually a set percentage such as 5% or 10%. It is money the contractor has earned but not yet been paid, and general contractors often hold it back the same way from their subcontractors.
When a drywall subcontractor finishes $40,000 of work in March under a subcontract with 10% retainage, the general contractor pays $36,000 for March and keeps $4,000, which the sub collects after the project wraps up and the closeout paperwork is in.
Why owners hold back retainage
Construction jobs are paid in installments called progress payments: each month the contractor bills for the work done so far. The owner's worry is the end of the job. The punch list (the final list of small fixes), final inspections and warranty binders are the part a contractor is least eager to finish once most of the money is in, so retainage keeps some of that money on the owner's side of the table.
It also protects the owner against liens. A mechanic's lien is a legal claim against the property that an unpaid sub or supplier can file, and the owner may end up paying twice to clear it. Holding funds until everyone has signed a lien waiver gives the owner a cushion if a payment somewhere down the chain went missing.
How retainage flows from owner to GC to sub
Retainage runs down the payment chain. The owner holds back part of what it owes the general contractor (GC). The GC, whose own cash is now tied up, holds back part of what it owes each subcontractor, and a large sub may do the same to its suppliers.
Each contract sets its own rate, so read your subcontract against the prime contract, the agreement between the owner and the GC. If the owner holds 5% and your subcontract says 10%, the GC is sitting on money the owner already paid. Some states cap this. On public projects in Washington State, RCW 60.28.011 lets a contractor withhold no more than 5% from a subcontractor.
Release follows the same chain. Subcontracts often say the GC pays a sub's retainage only after the owner pays the GC's. That is why a drywall crew that finished in month four of a 14-month job can wait most of a year for its last 10%.
How retainage appears on a pay application
Most commercial jobs bill monthly with a pay application, a formal request for payment that the architect or the owner's representative checks before the owner pays. In AIA billing, the cover sheet is the G702 Application and Certificate for Payment, which summarizes the contract sum, approved change orders, completed and stored work, retainage, previous payments and the current payment requested.
The detail sits on the G703 continuation sheet, which lists each line of the schedule of values (the contract price split into pieces of work such as framing, drywall and electrical). The G702 calculates retainage on completed work and, separately, on stored materials billed but not yet installed. Approved change orders adjust the contract sum, usually upward, and the work done under them usually carries retainage unless the change order says otherwise.
A worked retainage example
A GC signs a $1,200,000 contract to build out a medical office, with 10% retainage. By the end of the third billing period, $360,000 of work is complete. At the end of the second period the total was $220,000, and the GC was paid 90% of that, or $198,000.
| Pay application line | Amount |
|---|---|
| Contract sum to date | $1,200,000 |
| Total completed and stored to date | $360,000 |
| Retainage at 10% | $36,000 |
| Total earned less retainage | $324,000 |
| Less previous certificates for payment | $198,000 |
| Current payment due | $126,000 |
| Balance to finish, including retainage | $876,000 |
To check it: $360,000 minus $220,000 is $140,000 of work this period, and 90% of that is $126,000. The balance to finish is $1,200,000 minus the $324,000 earned net of retainage.
Now take the electrical sub on the same job, with a $180,000 subcontract and 10% retainage. This period it finished $50,000 of work, so the GC pays $45,000 and holds $5,000. By the final pay application, $18,000 of the electrician's money is in retainage. If the electrician expects an 8% profit, that is $14,400, less than the amount held back. Until release, the sub has paid its crew and its supplier and is carrying the gap itself.
When and how retainage is released
Release usually starts at substantial completion, the point where the owner can use the building for its intended purpose even though small items remain. Once the punch list is done, the contractor submits a final pay application or a separate retainage invoice with the closeout package.
The contract decides what goes in that package. It often includes final lien waivers from the GC and every sub, warranties, as-built drawings and, on bonded jobs, consent to final payment from the surety company (the bonding company that guarantees the contractor's work). Start collecting final waivers before the punch list is done, because one missing waiver can hold up the whole check. Track your own lien and notice deadlines too, since missing them removes your strongest fallback if the owner stalls.
Retainage rules in federal and state law
On federal contracts, the government's retainage is not automatic. Under FAR 32.103, in the edition effective March 13, 2026, the contracting officer (the official who runs the contract for the government) may hold back part of a progress payment only when the contractor has not made satisfactory progress. Each decision is made case by case, funds should not be held without cause, the amount cannot exceed 10% of the approved estimate (the value of work approved for that payment), and retainage "should not be used as a substitute for good contract management."
Under FAR 52.232-5, the payment clause for fixed-price construction contracts, a period with satisfactory progress is paid in full. At substantial completion, the government keeps only what it needs for protection and releases the rest. A separately priced building or section is paid without retainage once it is completed and accepted, and anything still held is paid promptly when the whole contract is complete.
These rules cover only what the government holds from the prime contractor. Under FAR 52.232-27, a subcontract on the same job can still let the prime hold a set percentage of each of your payments without cause.
As of October 2026, Washington requires public bodies to hold back retainage of up to 5% of what the contractor earns on public works, as a trust fund for claims under the contract and for state taxes. A contractor can post a bond in place of all or part of it.
The public body must release Washington retainage 60 days after all contract work is complete. Release is subject to the state's prevailing wage rules, to tax clearance certificates from the Department of Revenue, the Employment Security Department and the Department of Labor and Industries, and to lien claims, which must be noticed within 45 days of completion.
Private jobs work differently. Unless your state has a law covering private work, the contract sets the rate, what triggers release and any step-down in the rate. Check your state's prompt payment and retainage statutes before you sign. A construction attorney can tell you which ones apply.
How retainage shows up on the books
Retainage needs its own accounts. Otherwise it gets lost in receivables nobody checks for a year.
For the GC in the example, the third pay application debits accounts receivable $126,000 (due now) and retainage receivable $14,000 (due at the end) and credits contract revenue $140,000. Retainage receivable is an asset: money the customer owes you. When the electrician bills $50,000, the GC debits job cost $50,000 and credits accounts payable $45,000 and retainage payable $5,000, a liability for money it owes the sub.
At closeout, the owner's retainage payment clears the receivable and the GC's payments to its subs clear the payable. On cash-basis books (where entries are made only when money changes hands), none of this is recorded until the check arrives, so keep a separate schedule of retainage held on each job. Review a retainage aging report by job every month. A $120,000 retainage balance on a job that closed eight months ago deserves a phone call.
Retainage lives in your pay applications and accounting system, but you can only judge whether a job can carry it if you know what the job has cost so far. For construction companies, Clyr codes every card swipe, bill and reimbursement to the job and cost code while the crew is still on site, and vendor invoices go through approval before you pay them by ACH or check. Clyr syncs two ways with QuickBooks, Xero, Sage Intacct and NetSuite, so coded expenses and bills land in your books ready to reconcile.
FAQs
On an invoice or pay application, retainage is the amount held back from that bill. You bill for all the work you did, but the customer pays only the net amount now, such as 90% or 95%, and owes you the rest later. Show the gross amount, the retainage and the net due on separate lines so both sides can reconcile them.
Yes. Retainage, retention and retained percentage all mean a share of each progress payment withheld until the work is finished. Washington's public works statute says retained percentage, and plenty of people on site call it the holdback.
It depends on the contract and the state. On a private job, the clock usually starts at substantial completion and runs through the punch list and closeout documents, which can take weeks or months. On federal and Washington public jobs, the rules described above set the timing.
On accrual books, where you record income when you earn it, yes. Retainage is part of what you earned when the work was done, so it counts as revenue then, and the held-back part sits in retainage receivable until the customer pays it. On cash-basis books, it is not recorded until the money arrives. Tax timing can differ from your bookkeeping, so your CPA can confirm how retainage is treated on your return.
