What is retainage, and why is it usually mandatory on large commercial/public works projects?
Retainage is a percentage of the total bid, which a contractor (or subcontractor) pays upon submitting a bid for work. It is considered insurance, and a "good faith" tool; a way for public institutions/general contractors to assure that a company they are entering into an agreement with is solvent, insured, and will be around for the duration of the project.
The money, at least on public jobs, is supposed to be held in escrow, and paid back with interest when the contractor has fulfilled obligations under the terms of the agreement.
But a lot of companies (smaller ones, especially) are put off by requirements of retainage, and the trade is rife with horror stories about businesses never seeing their "good faith" money again. A wide-ranging discussion of retainage follows, beginning with conjecture about the real reasons GCs ask for it.
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After years of waiting out the final paybacks of checks I wrote months before, I finally said, "screw it." I'm convinced that the GCs are just using it as a profit lever, investing the money and only paying back the principal and official escrow rate.
You are correct though, I'm hearing more and more about slow pay, both with and without schemes or scams. I suggest a firm stand now, because when "things" slow down, and they will, the problem will get worse.
Deal with retainage on the front end with an incentive to pay on time or early, and a penalty if paid late. "Late" could be after a specified time period, and would be an incentive for the GC to resolve all punch list items quicker.
I changed my contract to read that there is only a 5 percent retainage and that it is due 30 days from the date the GC signs off on all of my work. I have not had a problem as of yet, (knock wood), I just fax and Fed-ex the copies of the contract as well as copies of the paperwork that the GC signed, stating that all work is complete and that he approves payment in full.
Sometimes it takes a few calls to the office that processes the paperwork, but it has worked up to this point. I also stress that I wish to continue doing work for them, even if I do not, and I think this helps as well.
I agree with the comments of others when it comes to the importance of understanding and reviewing the contract language on retainage. If you are small and/or relatively new in the area where you are working, it feels rather presumptuous to be setting your own terms against large general contracting companies. We have had situations where we were not successful in getting any contract changes made because the pat response is, "Our legal counsel has advised us against making any changes to this contract," which leaves you in the position of making an immediate decision on whether or not you want to do the job.
Most of the time we need the work, and we just shut up and put up. However, as we grow, I have also begun to realize that by the time it comes right down to signing the paperwork - which might even be after your staff is already mobilizing on the job - you may have more clout than you realize. On fast-track projects they need you almost as much as you need them, and you are in a better position to negotiate if you postpone signing until the last possible minute.
One last word: Don't forget to come right out and ask the firm that you are dealing with what their rate of retainage is. We had one job where we signed a contract allowing 10 percent retainage - which is fairly standard - but found out later that the firm we were dealing with only had 5 percent held on them. In this situation the contract lasted over a two-year period, so they sat on 5 percent of our money just because we were not sophisticated enough to ask the question.
So keep asking questions, and keep blowing your horn.
If you are not installing the product, only manufacturing it or selling a material, you are not bound to retainage, because you have not provided on-site work.
They will only be able to retain money on the price of your on-site labor.
I had to get out of commercial because I became 100 percent convinced an AIA contract was nothing, more or less, than a loan from me to the owner through the contractor who always managed to "retain" 10 percent of my money for handling the "loan."
Can't speak for other places but here they just look at you and tell you to whistle for your 10 percent, it's a cost of doing business. The contractors are thieves, admit it, and idiots still line up to quote, even knowing they will only be paid 90 percent of their "contract." If that much.
For our company, commercial work has some real strong advantages. One, I do not have to deal with the customer or play architect; two, I can go after just the type of work or product that I want or that we want to manufacture; and three, we never have to wait for someone to walk through the door with our next job.
We have always been paid on retainage, with one or two exceptions, true it sometimes takes awhile, but we try to work for a handful of good contractors that we can trust and companies that are just as interested in dependablity as price. Most of our projects are written up as a single subcontract, I don't usually go through the time and hassle of getting the GC to write up two separate contacts, but on the projects that are material only (no install), they never hold out retainage.
I remember reading about one company that has his installation company separate from his manufacturing operation for this exact reason.