Retainage and the owner's ledger: recording what is held and when it releases

Retainage is a percentage of each certified amount that the owner holds back until the work is complete. It exists to give the owner a hold over punch list, closeout documents and final reconciliation, and to give subcontractors a reason to finish. The rate is in the contract, often 5 or 10 percent, and in many states it is capped or reduced by statute for public work.

What the rate does not tell you is the balance. Retainage accumulates line by line on the G703, is sometimes reduced partway through the project, is sometimes released early for completed subcontractors, and is sometimes released on substantial completion and sometimes only on final completion. The owner's ledger should know all of this. Most do not.

What to record each month

From each pay application: retainage held on completed work this period, retainage held on stored materials, cumulative retainage held, and any retainage released this period with the written approval that authorized it. From the contract: the rate, whether it steps down at a percent complete threshold, whether early release for completed subcontracts is allowed, and what conditions attach to release at substantial and final completion.

The cumulative figure should be carried as its own line in the owner's position, beside certified to date and paid to date. Certified less retainage less previous payments is the amount due. Owners who track only the amount due lose sight of the balance they are holding, and are surprised at closeout by the size of the final payment.

Step downs and early release

Many contracts reduce retainage from 10 percent to 5 percent at 50 percent complete, or stop withholding altogether once a threshold is reached. Some allow release of retainage on a subcontractor's work once that subcontractor is finished and has delivered its closeout documents. Both are reasonable. Both need a written approval and an entry in the ledger, because each one reduces the owner's hold and each one is a point at which a missed condition, a lien waiver not received or a warranty not delivered, can slip through.

A fictional $37 million public library shows the pattern. Retainage was 10 percent to 50 percent complete, then 5 percent. The steel erector finished in month eight and requested early release. The owner approved it after receiving final lien waivers and the as built shop drawings. The ledger entry records the amount, the date, the approval, and the documents received. At closeout, when the county auditor asked why retainage released in month eight, the answer was one line.

Public owners and statute

Many states limit retainage on public projects, require it to be held in escrow or interest bearing accounts, or mandate release within a set period after completion. This post does not cover those rules. Check your contract and ask counsel what applies to your agency.

Retainage at closeout

Retainage release at substantial completion and final completion is conditioned on deliverables under most AIA A133 based agreements: the certificate of substantial completion, punch list completion, consent of surety, final lien waivers, warranties, as built documents, operations manuals, and the final reconciliation of cost of work against the GMP. The last item is the one that matters for shared savings. Releasing final retainage before the cost of work is audited removes the owner's hold over the reconciliation.

The ledger should carry a closeout checklist tied to retainage, with each condition marked as received or outstanding. The final payment amount is then a derived figure: retainage held less any amounts withheld for incomplete items, and it should not be computed until every condition is marked.

Where this sits in the owner's record

Retainage is a small part of the owner's position and an easy one to get wrong, because it is managed by the contractor's billing and approved by the architect, and the owner often sees only the net amount due. Recording the held balance, the releases and the conditions in the owner's own ledger takes a few minutes a month and removes the closeout surprise.

Costwitness records retainage from each pay application as part of the monthly snapshot, carries the cumulative balance as a position figure, and flags any month where retainage falls without a recorded release approval. At closeout it lists the release conditions from the owner's checklist against what has been received. The software tracks the balance. The owner decides when the conditions are met.

In the product

Monthly owner report, GMP baseline, Shared savings. Free tool: Pre-GMP Readiness Score, Shared Savings Calculator.

Keep reading

Earlier: Lender draw requests and the GMP position they depend on. Later: Over and under billing from the owner's side of the table. All articles on owner reporting.