3 things building contractors should know about retainage

As a building contractor, you may need up-front payment to buy building supplies, pay workers or secure permits. Your clients, though, may feel uneasy about paying fully before the project is complete. After all, they may believe there is some chance you may skip town.

Retainage is simply a percentage of the contract price that clients withhold to ensure contractors complete the job properly. While retainage has some advantages and drawbacks, you should know at least three things about it.

1. Retainage is legal

The Tennessee Code allows clients to retain a portion of the contract price. They typically may not retain more than 5%, though. Your construction contract should define the percentage and scope of retainage. Once you substantially complete the project, the property owner may not continue to withhold full payment.

2. Retainage rules may apply to your subcontractors

Just as a property owner may not withhold retainage from you after you complete the project, you may not withhold it from your subcontractors. After subcontractors complete their duties, you likely must pay them the full contract price. Furthermore, like retainage with property owners, you probably cannot retain more than 5% of your contract price from your subcontractors.

3. Violating retainage rules may be criminal

Complying with Tennessee’s retainage rules is not only good for business, but it also keeps property owners, contractors and subcontractors out of trouble. That is, a violation of retainage rules be a misdemeanor offense that triggers a hefty fine.

Even though retainage can be a complicated matter, it is critical for property owners and others to do it properly. Ultimately, having precise language in your construction contract may be the most effective way to comply with the law while making a profit.