In the coming months, having cash available for your company will be instrumental for contractors trying to survive the COVID-19 pandemic. You have bills, overhead, and man-power, while jobs are getting harder to come by. Collecting on outstanding invoices should be at the top of your Coronavirus To-Do List. If some of that money is tied up in retainage on jobs you’ve already finished, don’t wait until the coronavirus pandemic is over. The time to get paid for it is now.
How retainage works in construction
Retainage is a percentage of each payment withheld from the subcontractor. Retainage, also called retention, is usually in the realm of 5 to 10 percent of the payment. At the completion of the project, that percentage is supposed to be paid to the subcontractor, as per the contract.
In some states, retainage is barred from contracts, while other states only allow retainage to be withheld from the GC. Also, if you’re subject to retainage, you should be sure to have it detailed specifically in the contract. That being said, some states don’t require retainage to be included in the contract before being utilized, in which case retainage misuse can be a serious issue.
Dig Deeper: Read the Ultimate Guide to Retainage in Construction
How and when retainage should be paid
Ultimately, retainage requirements are governed by the construction contract and the laws of the state where your project takes place.
An owner may withhold percentages of the job being paid to the General Contractor. Once certain milestones are met throughout the project, the owner might release a percentage of the withheld money to the General Contractor.
The same situation often plays out between a General Contractor and a subcontractor. Once particular goals towards completion are realized, the GC may pay a percentage of the retained cash.
This is not always the case however, and this is another situation that depends on your state. All of the retained money is often withheld until the completion of the job, either by the owner or the GC. Certain states have statutes that state the money must be paid within a certain time or that a contractor must be paid retainage “within a reasonable timeframe.”
As you can imagine, this can cause major cashflow issues for construction businesses, as retention percentages often exceed profit margins on some jobs.
How COVID-19 can affect retainage and money owed to you
Retainage is already challenging for subcontractors without enduring these difficult times. The practice is prone to unfair leverage and long timeframes before payment is issued. This leads to a serious lack of cashflow during good times, recession aside.
Owners and General Contractors are also being hit by the recession caused by COVID-19, and as such, they’re protecting what assets they have. The most critical of these assets is cash. Even benevolent GCs may withhold cash from subs for as long as possible, as having that money in their account may help them survive the slow-down.
Download the Coronavirus Survival Kit for Construction Businesses
Contractors and suppliers can take simple, concrete steps now that will help protect their business, employees, and financial health during the coronavirus – and set up their business for success once the dust settles.