Glossary Term

Retainage

What is Retainage?

Retainage is a portion of a contractor's payment that is withheld by the property owner or lender until the construction project is completed and all contractual obligations are met. This financial mechanism ensures quality and provides an incentive for contractors to address punch list items, correct deficiencies, and finalize the project according to the agreed-upon terms.

How Retainage Works

Retainage is typically calculated as a percentage of each payment due to the contractor, ranging from 5% to 10%. Key steps include:

  • Withholding: A portion of each progress payment is retained by the owner or lender throughout the construction period.
  • Completion Review: Once the project is complete, the retained funds are released after the final inspection and resolution of any outstanding issues.
  • Conditions for Release: Contractors must satisfy all contractual requirements, including addressing punch list items, before receiving the retained amount.

    • Why Retainage is Used

    Retainage serves as a safeguard for property owners and lenders:

  • Quality Assurance: Ensures contractors complete all work to the required standards before full payment is made.
  • Incentive for Completion: Motivates contractors to address deficiencies and finish the project on time.
  • Risk Mitigation: Protects property owners and lenders from potential disputes or uncompleted work.

    • Challenges of Retainage

    While beneficial, retainage can create challenges for contractors and property owners:

  • Cash Flow Constraints: Contractors may face financial pressure due to delayed access to a portion of their payments.
  • Disputes: Disagreements over project quality or punch list items can delay the release of retained funds.
  • Administrative Burden: Managing retainage requires clear documentation and effective communication between stakeholders.

    • Best Practices for Managing Retainage

    To minimize issues related to retainage:

  • Clearly define retainage terms and conditions in the construction contract.
  • Maintain detailed records of work completed and payments withheld.
  • Communicate regularly with contractors to address concerns and ensure timely resolution of punch list items.

    • Retainage and LYNK Capital

    At LYNK Capital, our team can give you tips on negotiating a construction contract with your general contractor that is most advantageous to your project.

     
     
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    *LYNK Capital Fund, L.P. operates as LYNK Investments, LLC in the state of Texas.
    LYNK Capital offers fix & flip loans, new construction loans, bridge loans, and DSCR rental loans to real estate investors.
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    Private Lending Glossary - Retainage