Retainage Explained With a Real Example, Pay Application by Pay Application

Retainage is the part of a progress payment the owner holds back until the job is finished. Most people in construction know the idea. The trouble starts when the same contractor has four jobs, each holding back a different percentage, and someone asks a simple question: how much of our money is sitting in retainage right now?

The easiest way to see how it works is to follow one job from the first pay application to closeout. The numbers below are an example, not a quote from any real contract.

The example job

A contractor signs a $480,000 contract. The contract holds back 10 percent of each progress payment as retainage, to be released at closeout. The job is billed on the AIA G702 and G703 forms, the standard application for payment, with the work completed so far listed line by line on the G703.

Pay application 1

By the end of the first month the contractor has completed $120,000 of work.

• Work completed to date: $120,000
• Retainage held at 10 percent: $12,000
• Amount payable this period: $108,000

The contractor did $120,000 of work and receives $108,000. The other $12,000 is earned but not yet payable.

Pay application 2

By the end of month two, total work completed is $260,000. A common mistake here is to apply the percentage to this month's work only and lose track of the running total. The form works from the cumulative figure.

• Work completed to date: $260,000
• Total retainage held at 10 percent: $26,000
• Less retainage already held on pay application 1: $12,000
• Retainage added this period: $14,000
• Payments already received: $108,000
• Amount payable this period: $260,000 less $26,000 less $108,000 = $126,000

After two applications the contractor has billed $260,000, has been paid $234,000, and is owed $26,000 that sits in retainage.

Closeout

When the work is finished, the full $480,000 has been billed and $48,000 is held. That $48,000 is typically 10 percent of the whole contract, and for a small contractor it can be more than a month's payroll. It does not come back automatically. Someone has to finish the punch list, hand over the closeout documents, and send a final application that asks for it.

Where contractors lose track

• Different terms on every job. One contract holds 10 percent until completion. Another holds 5 percent. Some reduce the percentage after the job is half done. A contractor who keeps this in a note on each invoice has to read every invoice to find the total.
• Retainage held from subs. A general contractor often holds retainage from subcontractors too, so the same money is owed in two directions on the same job.
• No one asks for the release. Retainage is earned money. If nobody owns the closeout step, it can sit for months after the job is done.
• State rules. Many states set limits on how much can be held and how soon it must be released after completion. They vary, so check your own state and your contract before relying on any rule of thumb, including the ones in this post.

What good tracking looks like

Retainage should be worked out on every application from the cumulative total, kept as its own running balance for each job, and rolled up across jobs, so the question "how much is held right now" has one answer you can read off a screen. When the percentage changes or a release is due, the system should show it, not leave it in an old PDF.

That is how it works in PoPs Suite. PoPs Project Tracker withholds retainage as part of AIA G702 and G703 progress billing, and the balance is tracked per job rather than as a line on an invoice. PoPs Ledger carries the same figures in the books.

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Related reading: Retainage, defined · AIA progress billing (G702/G703) · AIA G702/G703 billing software