Retainage in Construction: Upgrade with e-Builder
Retainage in Construction: Upgrade with e-Builder
Thursday, October 13, 2022
What is Retainage?
Project retainage in construction is a common practice used in the industry. It is defined as withholding a percent from each progress payment to a contractor or subcontractor per contractual obligations. Construction retainage is used to ensure that the contractor completes a project to an owner’s terms and conditions, and it serves as an incentive for contractors to reach successful completion of a project.
Project retainage can be difficult to track manually - owners are looking to e-Builder to keep track of their finances with line items for project retainage, especially as demand for infrastructure projects increase.
How Does Retainage Work?
When an invoice is submitted, the contract retainage amount is shown as a line item on an invoice, and indicates the percentage the owner withholds from each check. Contract retainage amount can vary between project type and between states and is held by the owner in a separate account until paid to the contractor or subcontractor. Once the owner deems the project “sufficiently complete”, the contractors or subcontractors can be paid.
Project retainage can be difficult to track manually - owners are looking to e-Builder to keep track of their finances with line items for project retainage, especially as demand for infrastructure projects increase.
Construction Retainage Laws by State
There is no across-the-board set rate for project retainage, and it varies between commitments, projects, and states. Oftentimes, states regulate project retainage and have various laws governing the practice. While some states are unregulated, others vary and allow no more than 5% or 10% project retainage by law. In other states, project retainage amount is simply defined as a “reasonable amount”.
Make sure to check out the dedicated map in the video below for more details on the laws in each state.
Advantages and Disadvantages to Retainage
Of course, there are different parties involved with retainage and can affect each differently, with both advantages and disadvantages.
Retainage vs. retention: Retainage is not to be confused with retention, where retention would be the act of withholding money, and retainage is the amount withheld.
Some advantages to using project retainage are the following:
- The most tangible benefit is to capital project owners, who use project retainage to encourage satisfactory project completion by contractors and subcontractors and protect against non-compliance.
- Banks and loaning organizations also appreciate the incentive for project completion, as retainage is a method to reduce their risk in lending while also increasing insurability.
- And contractors use project retainage to ensure completion of work done by subcontractors.
Using retainage also has the potential to negatively impact subcontractors and suppliers, such as:
- Most subcontractors and material suppliers float the costs of their projects. Postponing 5-10% of their contractually obligated income on each invoice before retainage release can have serious implications to their cash flow, particularly in the event of a potential recession.
- Subcontractors who complete their work before the end of the project have the longest to wait, as the entire project must be completed before retainage is released.
How E-Builder’s Retainage Feature Works
Within e-Builder, the system has the capability to retain a certain set percentage of each payment application per contractual terms. When this percentage is consistent throughout the life of the contract, it’s fully supported by e-Builder. However, some projects require a variable retainage that changes based on certain conditions, and the system needs to change to match the contractual obligations. For example, when a project reaches 50% completion, the project retainage would decrease from 10% to 5%.
Historically, accounting for retainage within e-Builder has been a manual process. There is an inherent ability to manually modify the retainage commitment or conditions in the payment application process to validate when a certain criteria is met.
When notified of the completed milestone, e-Builder users would go into the commitment, edit the commitment, and change the retention rate in the line items. For a small commitment with 5 line items, it’s minimal effort. It gets more complicated with large commitments that have hundreds of line items - like a construction contract. This opens the door for error due to manual data entry and wasted time.
e-Builder is dedicated to reducing or eliminating the need for manual entry, saving time and reducing risk due to manual input errors.
With variable retainage, owners needed something to make sure the commitments and retainage rates are changed properly according to the contract terms.
There is now a special step you can insert into your process that will automate variable project retainage based on the business rules that the contract dictates. With a few simple steps, you can make it specific to your processes and contracts and variable retainage can be fully automated. With this update, owners can avoid potential data entry errors and reduce the amount of time spent on processing payment applications. The system also keeps those in charge of finances up-to-date, and specified users will automatically be alerted of successful completion of commitment percentage.
Watch the video below to see our senior software engineer provide a full step-by-step explanation of setting up variable retainage in e-Builder.
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