Retainage explained: how it is held and paid

How retainage works

Each month the contractor submits a payment application. It lists the schedule of values, the work completed to date, materials stored on site or in an approved location, and the payments already received. The owner pays the value earned to date, less retainage, less what it already paid.

The contract sets the rate and the rules. Common patterns include:

• a flat rate held on every payment until final completion
• a higher rate early in the job that is reduced, or stopped, once the job reaches a milestone such as half complete
• release of retainage on a subcontractor's scope once that scope is finished and accepted
• release of most retainage at substantial completion, with an amount kept back for the punch list

On public work, and on some private work, state law caps the rate or sets release deadlines. Those limits differ by state and by type of project, so read the contract and the law for the job in front of you rather than assuming a number.

A worked pay application with invented numbers

Contract sum $850,000. Retainage is 10% of work completed and stored materials.

• Work completed to date: $510,000
• Stored materials: $15,000
• Total earned: 510,000 + 15,000 = $525,000
• Retainage: 525,000 x 0.10 = $52,500
• Earned less retainage: 525,000 - 52,500 = $472,500
• Previous payments: $360,000
• Due this period: 472,500 - 360,000 = $112,500

Check by a second route: 525,000 x 0.90 = 472,500, and 360,000 + 112,500 = 472,500.

What retainage does to cash flow

Retainage often holds back more than the contractor's profit. Using the same contract, suppose the job costs $782,000 to build, a profit of 850,000 - 782,000 = $68,000, or 8% of the contract.

• Retainage at the end of the job: 850,000 x 0.10 = $85,000
• Cash collected before release: 850,000 - 85,000 = $765,000
• Cost already paid out: $782,000
• The contractor is out of pocket by 782,000 - 765,000 = $17,000 until retainage is released.

Check: the $85,000 held is the $68,000 profit plus the $17,000 shortfall. A contractor carrying several jobs like this funds the gap from working capital or a line of credit, which is why sureties and lenders watch retainage receivable on the balance sheet. See contractor financial ratios.

Passing retainage down to subcontractors

A general contractor that is held 10% by the owner usually holds 10% from each sub, so it is not paying out money it has not received. Some subcontracts allow retainage on a sub's scope to be released early when that scope is finished, which matters for site work and foundation trades who finish months before the building does. Whether the general contractor can hold the sub's retainage until the owner releases its own depends on the subcontract terms and, in some states, on law. The pay-if-paid vs pay-when-paid guide covers that kind of clause.

Common mix-ups

• Leaving out stored materials. If the contract retains on stored materials, they are part of the total earned before retainage is taken.
• Subtracting retainage from this period only. Retainage is figured on the total earned to date, then previous payments are subtracted.
• Treating retainage as the owner's money. It is earned by the contractor and only held. It shows as a receivable on the contractor's books.
• Stating one state's cap as the rule. Rates and release deadlines are set by contract and, where they apply, by each state.

On the NASCLA exam

Payment applications and retainage belong to Procurement and Contracting Requirements, 31 of the 115 scored questions. They are arithmetic you can do faster than a lookup. Write the steps in order (earned, retainage, earned less retainage, previous payments, due) and check with a second method.

Practice it

Check a pay application with the free retainage calculator. Retainage interacts with lien waivers, because a progress waiver should state the amount actually paid. Work a change order into the schedule of values and run the pay application again. Build the pay application line by line with schedule of values and pay applications, and see when the held amount usually comes due in substantial completion and punch lists.

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Sources

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• PSI Candidate Information Bulletin 1458, content outline and reference list, updated 7 Jul 2026. Retrieved 5 Nov 2026.
• NASCLA Commercial Exam, NASCLA. Retrieved 5 Nov 2026.