Retainage in one example
A subcontractor bills $100,000 for work completed this month under a subcontract with 10% retainage. The general contractor pays $90,000 now and holds $10,000 as retainage until the subcontract is complete.
Retainage meaning
Retainage (also called retention) means money earned under a construction contract that is deliberately withheld from each payment and paid later, once the work is complete and accepted.
It flows down the payment chain:
- The owner withholds retainage from the general contractor’s pay applications.
- The general contractor withholds retainage from each subcontractor’s progress bills.
- Subcontractors may withhold from their own lower-tier subcontractors and suppliers.
For the party holding it, retainage is a liability (retainage payable); for the party waiting for it, an asset (retainage receivable). See retainage accounting for the journal entries.
How much is retainage? Typical rates
Five to ten percent of each progress payment is the usual range. Federal construction contracts cap retainage at 10%, and most state public-works statutes cap it lower — commonly 5%.
| Context | Typical or maximum retainage | Source |
|---|---|---|
| Federal construction contracts | Not more than 10% of the approved estimate | FAR 32.103 |
| States that set statutory limits | Prevailing range 5–10% | ConsensusDocs (2025) |
| Many state public-works contracts | Often 5%, sometimes 10% until 50% complete | State statutes |
| Private contracts | Set by contract unless a state caps it (e.g. California 5% from 2026) | State statutes |
| New Mexico | Retainage prohibited on most contracts | N.M. Stat. § 57-28-5 |
The rule for each state is in the retainage laws by state table.
How retainage is held
Each progress billing is reduced by the retainage percentage, and the withheld amounts accumulate as a retainage balance per contract until release.
- 1The contract sets the rate (for example 10%) and any reduction — such as dropping to 5% or stopping at 50% complete.
- 2Each pay application or progress bill shows the work completed this period and the retainage withheld from it.
- 3The payer pays the net amount and records the withheld amount as retainage payable for that job and vendor.
- 4The balance builds over the job; the contract or state law may require it to be held in escrow or an interest-bearing account.
To work out the numbers — including a reduction at 50% — use the retainage calculator, which walks through how to calculate retainage with a worked example.
How retainage is released
Retainage is usually released at substantial completion or final acceptance, after the punch list is closed and final lien waivers are delivered, and within any deadline set by the contract or state law.
- 1The work (or the subcontractor’s scope) reaches substantial completion and is accepted.
- 2Punch-list items are completed, or the owner holds back a multiple of their value.
- 3Closeout documents and final conditional lien waivers are collected.
- 4The contractor submits a retainage billing or final pay application.
- 5The payer releases retainage, and the contractor passes subcontractors’ shares down within the statutory window.
- 6Final unconditional waivers are collected once the release payment clears.
Some contracts and statutes allow partial release earlier — at 50% completion, or when a subcontractor’s scope finishes early in the job. Federal projects pay retained amounts promptly once contract requirements are complete (FAR 32.103), and on DOT-assisted projects subcontractor retainage must be paid within 30 days of satisfactory completion (49 CFR § 26.29).
Retainage vs retention
They mean the same thing. “Retainage” is the common US term; “retention” is used in the UK, Australia, and in many US statutes and contracts (California’s statute, for example, says “retention payment”).
| Term | Where you see it |
|---|---|
| Retainage | US contracts, AIA pay applications, federal regulations (FAR 32.103) |
| Retention | UK and Australian contracts; several US statutes (e.g. Cal. Civ. Code § 8811 “retention payment”) |
| Retainer (not the same) | An advance deposit paid before work — unrelated to construction retainage |
Why retainage exists — and the downside
Retainage protects the payer against unfinished or defective work, but it ties up the contractor’s and subcontractors’ earned cash, often for months after their scope is done.
| For the payer | For the contractor or subcontractor |
|---|---|
| Leverage to finish punch lists and closeout | Earned cash held, sometimes for the whole job |
| Cushion against defects or a default | Early-trade subs wait longest (sitework, foundations) |
| Encourages final paperwork (waivers, warranties) | Release delays when the owner pays late |
Aequo Build
How Aequo Build handles retainage
Aequo Build reads the retainage percentage from the active subcontract for the job and vendor (falling back to the job default) and calculates the hold when the subcontractor’s invoice is approved, recording the held amount and the net payable in the same transaction. An approver can enter a reviewed amount instead. Each hold is linked to its source invoice so a retried approval cannot create a duplicate, and an invoice cannot be rejected once its retainage has been released.
Release is a two-step, permission-controlled action — request, then approve — for a partial or full amount up to the remaining balance. Held, released, and remaining retainage can be filtered by job, vendor, and status, and subcontractors see their own holds in the portal. Aequo Build also prints retainage on AIA-style G702/G703 pay applications.
Frequently asked questions
What does retainage mean in construction?
A portion of each progress payment, typically 5–10%, that is withheld from the contractor or subcontractor until the work is complete, then released under the contract and any applicable state law.
What is a typical retainage percentage?
5% to 10%. Federal construction contracts cap it at 10% (FAR 32.103) and many state public-works statutes cap it at 5%; private contracts often use 10%, sometimes reducing to 5% at 50% complete, unless a state cap applies.
When is retainage paid?
Usually at substantial completion or final acceptance, after the punch list is done and final lien waivers are delivered, within the deadline set by the contract or state statute — commonly 30 to 60 days on public work.
Is retainage the same as retention?
Yes. Retainage is the usual US term and retention the UK and Australian term; many US statutes use “retention” too.
How do you calculate retainage?
Multiply the amount billed by the retainage rate: $50,000 billed at 10% retainage means $5,000 withheld and $45,000 paid. The retainage balance is everything withheld to date minus anything released. The retainage calculator handles reduction milestones.
Is retainage taxable income when it is withheld?
Timing of income and deductions for retainage depends on your accounting method and contract terms — ask your tax adviser.
Related guides and tools
Sources
This guide is general information, not legal or tax advice. Retainage rules depend on your contract, the project’s owner type, and state law.
- FAR 32.103 — Progress payments under construction contracts (acquisition.gov)
- FAR 52.232-5 — Payments under Fixed-Price Construction Contracts (acquisition.gov)
- 31 U.S.C. § 3905 — Prompt Payment Act, payment provisions relating to construction contracts (Cornell LII)
- 49 CFR § 26.29 — Prompt payment and retainage on DOT-assisted contracts (Cornell LII)
- ConsensusDocs — “It’s My Retainage and I Want It Now!” (Sands & Bolte, July 2025)
- Cal. Civ. Code § 8811 — retention payment on private works (California Legislative Information)
- N.M. Stat. § 57-28-5 — Prompt Payment Act (FindLaw)
Part of the Construction AP Knowledge Centre.