Retainage and prompt pay: getting the rest of your money

Two things quietly decide how much of your money you are actually holding at any moment: retainage and prompt-pay laws. Retainage is the slice of every payment the customer or GC holds back until the job is finished, often 5 to 10%, sometimes for months after you have walked off. Prompt-pay laws are the other side: they set how fast you have to be paid, and often owe you interest when payment runs late. Both are set by your state, and both are leverage most contractors leave on the table. Know your state's numbers, in Working in Your State.‍‌‌‌​‌​‌​‌​​‌​​‌‌‌​​‌​​‌​​​​‌​‌​​‍

Retainage: your money, held back

Retainage (also called retention) is a portion of each progress payment the paying party keeps as a kind of security deposit, held to make sure you finish and fix any defects. The old norm was 10% held throughout, dropping to 5% once the job is halfway done. The clear trend now is states capping it at 5%.

The thing to hold onto: it is your money. You earned it. It is just parked in someone else's account until the end. On a big job with thin margins, 5 to 10% of the total can be more than your entire profit, sitting out of reach for months. That is a cash-flow problem dressed up as a payment term, and it sinks contractors who do not plan for it.

Don't let retainage bury you

• Put release milestones in the contract. Spell out exactly what triggers release and by when, so it is not left to the paying party's mood.
• Know your state's cap and clock. Many states cap retainage at 5% and set a hard deadline to release it after completion, with interest owed if they miss it. Some also let you swap cash retainage for a bond or securities, which frees your cash while still protecting the owner.
• Chase it the day it is due. Retainage that is never asked for is retainage that sits forever. Put the release date in your calendar and follow up the moment it passes.
• Send the letter, do not make another phone call. Your state's page carries three ready-made letters with that state's own release clock and statutory citation already written into them: a Retainage Release Request for when the job is done and the money has not come back, a Retainage Overdue demand for when the release date has gone by, and a Challenge Letter for when more is being held than the state appears to permit. They are in the Document Hub and on your state page in Working in Your State.
• Do not let a patient chase run out your lien clock. This is the one that costs real money. Your lien deadline is set by statute and it does not pause while you are being reasonable about retainage. Polite reminders are not a rung on the ladder: put the mechanic's lien deadline for your state in the calendar next to the release date, and read Not been paid? Here's your ladder of options before the release date passes, not after.

Prompt-pay laws: the deadline to pay you

Most states have prompt-payment laws that set how many days the owner or GC has to pay you after you bill or finish, on both private and public work. Miss the deadline and they can owe you interest on the late amount, and sometimes your costs on top.

On a federal job the clock is written down, and it is shorter than you think

Federal construction runs on FAR 52.232-27, and unlike a private payment term it is not something the other side gets to set:

• Progress payments are due 14 days after the designated billing office receives a proper payment request. Not thirty. Fourteen.
• Final payment is due on the later of two dates: the 30th day after that office receives a proper invoice, or the 30th day after the Government accepts the work.
• Retained amounts are due when the contract says. If the contract says nothing, they are due 30 days after the Contracting Officer approves their release.
• The interest penalty is paid automatically, "without request from the Contractor." You do not have to ask for it, and not asking does not waive it. The rate is the one the Treasury sets and publishes for 41 U.S.C. 7109.

Two things in that clause cut the other way, and you should know both before you rely on it. The word "proper" is doing a lot of work: the clock only starts on a proper payment request, and the clause lists eleven things one has to contain. The counterweight is that an improper invoice has to be returned to you within 7 days with the reasons, and if the Government is late telling you, it has to take that into account when it computes what it owes. The second is that there is no interest penalty on amounts withheld or retained in accordance with the contract, or where there is a genuine disagreement about quantity, quality, or compliance. Retainage held properly is not a late payment. It is a slow one.

If you are the sub on a federal job, this is the paragraph

The prime does not get to hold your share while it decides what to do next. A federal construction prime contract has to carry a clause obliging the prime to pay each subcontractor within 7 days of being paid by the agency, with an interest penalty on anything late at that same Treasury rate.

Two limits on it, both real. The prime can still negotiate retainage with you in the subcontract and hold that without owing you a late-payment penalty, so read your own subcontract before you count on the 7 days. And the prime can withhold for cause. But if it withholds, it owes you a written notice before your payment is due, and that notice has to specify three things: the amount being withheld, the specific cause under the terms of your subcontract, and the remedial action you have to take to get the money released. A copy goes to the Government. A withholding with no notice, or a notice that will not tell you what to fix, is not the deal the statute describes, and saying so in writing is often enough.

This is real leverage, and it is underused. A demand letter that quietly cites your state's prompt-pay law and the interest now running is a very different letter from "please pay." Often that is all it takes.

The move

• Find your state's retainage cap, its release timing, and your prompt-pay deadline and interest rate. They vary a lot, so get them from Working in Your State or the Retainage Calculator, not from a neighbor.
• Write the release terms into every contract.
• Treat retainage as money you are owed, not a favor, and chase it on the day.
• If the GC is sitting on your retainage because the owner has not paid them, that is a different fight with a different rule. Read When the GC won't pay: "the owner hasn't paid us yet" before you accept the explanation.
• When the release date has gone, escalate in writing with the figures attached, not with another call. How to write a demand letter that actually gets you paid is the format, and a demand that cites your state's prompt-pay deadline and the interest already running is the version that works.

Common questions

What is a normal retainage percentage?

Historically 10% held back on every payment, dropping to 5% once the job is halfway done, and the clear trend now is states capping it at 5%. It is a portion of each progress payment the customer or GC keeps as security until you finish and fix any defects. The exact cap that applies to you is set by your state and by whether the job is public or private, so get your number from Working in Your State or the Retainage Calculator.

When do I get my retainage back?

Usually after the job reaches completion or final acceptance, on a deadline your state sets, and many states owe you interest if they blow it. It is your earned money parked in someone else's account, not a favor. Put the release trigger and date in your contract, calendar it, and chase it the day it comes due. Release timing varies a lot by state, so confirm yours in Working in Your State.

Can I get interest if I'm paid late?

Often yes. Most states have prompt-pay laws that add interest, and sometimes your costs, once a payment runs past the legal deadline, on both private and public work. On federal jobs the federal Prompt Payment Act pays Treasury-rate interest automatically, without you even asking. The state deadline and rate vary, so cite the right figures from Working in Your State before you put them in a demand.

Can they hold my retainage forever?

No. States set a hard window to release retainage after completion, and dragging past it can trigger interest and give you the same collection tools as any unpaid bill. Some states also let you swap cash retainage for a bond or securities, which frees your cash while still protecting the owner. The cap, the clock, and the swap option are all state-specific, so see Working in Your State.

The honest bit

• Retainage caps, release timing, and prompt-pay deadlines and interest are all set state by state, and they change (several states moved to a 5% cap recently). Confirm yours before you rely on it. See Working in Your State.
• This is general guidance, not legal advice. For a large sum held past its deadline, the same tools apply as any unpaid bill: your prompt-pay interest, your lien, and if needed an attorney.

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