Retainage or retention is the amount “held back” from the contractor or subcontractor during the term of the construction project. It is a prevalent practice within the construction industry. Most construction contractors keep a certain percentage of the contract price (5% or 10%) withheld until the entire project is completed.
Retainage creates cash flow problems for the contractor, and this issue is heightened, especially during the current Coronavirus pandemic. In light of the current situation, as projects are getting delayed, this practice is frequently abused, and payments are being withheld. It proves to be a credit crunch for construction companies, but there are ways to remedy the situation.
Retainage is problematic because they cause practical issues within the already complicated construction world. According to a report published by the American Subcontractors Association (ASA), subcontractors believe that “[prime] contractor/owner abuse of their retainage.”
Here are some practical tips for dealing with the potential impact of Retainage during coronavirus pandemic.
At the end of the day, businesses fail due to one reason – when it runs out of cash. This cash flow problem is made even worse by Retainage. Here are a few tips for managing the impact of Retainage on your construction business.
Learn How the Federal Law Works and the Contractual Details.
Did you know, If Retainage is not specified in your contract, then it does not exist? A GC cannot just hold your payment without agreeing to withhold on writing. Understand your contractual details and state laws regarding the percentage of retention. Examine every single detail about Retainage and confirm the rates.
Ask the GC or owner about Retainage, will it be withheld with interest? Who is entitled to that interest. According to a study, the typical retention percentage ranges as below:
- Private Jobs – 7.5%
- State Jobs – 5.5%
- Federal Jobs – 3.2%
Make sure to read the contract details thoroughly before entering into a contract where money will be withheld. You can also consult a Quantum expert regarding your contractual details and available options.
Negotiate on Retainage
If your company has been in the business for long and has a good track record of success, then ask your customers to renegotiate the percentage withheld, especially in light of the present economic downturn due to the Coronavirus outbreak. Make sure to present alternate options or substitutes to retainage requirements like a letter of credit or surety bond.
Another alternative to Retainage is “retainage bond.” Retainage bond represents security, in case a project goes sideways, this bond to help smooth things over, without withholding funds from project payment. It never hurts to ask; therefore, explore different alternatives that all the parties are comfortable with.
Plan for Financial Impact on Cash flow
Once you have established that there are no alternatives to Retainage, then plan your cash flows. During the current pandemic with less to no capital flow and delays in projects, liquidity is a must for businesses to survive the crisis. This is the time to calculate your TRUE numbers and see where you stand financially.
Do the math and make a plan to ensure access to capital and maximum liquidity so your business can stay afloat during the crisis. One of the reasons why construction businesses fail faster than any other industry is due to the issue of cash flow in the industry, which is worsened by Retainage.
Leverage your rights of Mechanics Lien to ensure payment
One cannot stress this enough. Even if you have the smallest doubt, Mechanics lien is the most powerful tool for companies in the construction industry to secure payments. These payments also include Retainage. However, lien laws and Retainage are quite contradictory, so consult a Quantum expert before filing the lien to ensure payment.
There is a small window to file lien claim to ensure that you meet the deadline and file before Retainage is due. Most states empower the party filing the lien to claim for the full amount of what they are owed against a construction project. During the current coronavirus pandemic, you can skip the preliminary notice or letter of intent of a lien, just file for the lien online, electronically before time runs out.
Withheld Cash Cripples the Cash Flow
All construction companies need to understand that ‘retainage does not mean that the mechanics lien deadline has been extended.’ GC doesn’t pay the Retainage until 1 year after the completion of the project! Therefore, understand your options and be prepared to deal with the credit crunch during the crisis.
If you want to make sure your business stays afloat during the crisis, then you need every single penny in your account or prepare for a downturn.
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