Retainage in Construction – Purpose, Accounting and Law
Minimum Bottom Line Profit Should Average 9.4%!
For Trades & Subcontractors, at Least 11%
After Income Taxes Are Paid!
A tool used by a developer, contractor or homeowner to keep the primary party committed to getting the project completed is called ‘retainage’. In effect, retainage means to withhold a small percentage of all payments until all the work is done. The idea is prevent the contractor, subcontractor or vendor from earning their respective profit until they have completed their agreed upon service. Historically, profits for contractors were universally accepted as 10% of the contract price. Thus, the norm is to withhold 10% of all payments as retainage. Once work is done, the contractor, sub or vendor would receive all amounts retained with their final installment. Think of it as an insurance policy to ensure everyone keeps working. If the contractor, subcontractor or vendor fails to get everything done, then the retainage is lost, forsaken or used as a penalty for failure to complete the work.
Retainage is still used today to entice the party performing services to
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