Construction contracts often include protections that help ensure project completion and quality work. One of the most common protections is “retainage.” This provision lets the payer hold back part of a payment until the project meets certain conditions.
Retainage can affect how contractors and subcontractors manage project finances. When reviewing a construction contract, understanding retainage may help construction professionals spot risks before work begins.
What retainage means and how it works
Retainage is a set percentage held from progress payments during a construction project. Instead of paying the full invoice amount, the payer releases most of the payment and keeps a small portion in reserve. The payer holds this portion until the project reaches substantial completion and the contract terms are satisfied.
Tennessee law regulates retainage. State law limits the amount that a party may withhold to 5% of the contract amount. The law requires parties to place retainage funds in a separate escrow account. Failing to follow these escrow requirements can lead to legal penalties for the payer.
Retainage provisions worth reviewing
Before signing a construction contract, contractors and subcontractors may want to review the retainage language carefully. Key provisions may address:
- The exact percentage withheld from each payment
- When the payer must release retainage
- Whether the contract allows partial release during the project
- Conditions required before final payment
- The process for resolving disputes
These provisions help define when payment will occur and what steps must happen first.
Financial impact on contractors and subcontractors
Retainage can affect project cash flow because the payer holds back part of each payment during the project. As a result, contractors and subcontractors may have fewer funds available while work continues.
This reduction may affect payroll and other project expenses. Contractors and subcontractors may need to cover those costs while they wait for retainage to be released.
For that reason, many construction professionals review retainage provisions closely before signing a contract.
Understanding retainage before signing
While retainage is a standard part of the industry, it should never be an area of uncertainty. It helps encourage proper project completion. At the same time, it affects when contractors receive full payment.
A careful review of these provisions can help contractors and subcontractors understand their payment schedule and reduce the risk of costly disputes later.
