Retainage in Construction: How It Works and How to Track It (2026)
What retainage is, the federal 10% cap, how it flows to subcontractors, and how to bill, book and collect it without losing track of money you have earned.
On most commercial and public construction jobs, you do not get paid the full amount of your monthly pay application. The owner keeps back a slice of every payment, called retainage (or retention), and releases it only when the job is finished. On a long project, that slice adds up to a large share of your profit sitting in someone else’s bank account, and it is the money contractors most often lose track of at closeout.
This guide explains how retainage works, what the federal rules say, how it passes down to subcontractors, and how to bill, book and collect it. Federal rules were checked against the Federal Acquisition Regulation (FAC 2026-01) on November 2, 2026.
This is general information, not legal or accounting advice. Retainage terms come from your contract and your state’s law; check both.
How retainage works
- You submit a progress payment request (often an AIA-style pay application) for the work completed that period.
- The owner approves it but pays it minus the retainage percentage set in the contract.
- The withheld amounts accumulate over the job.
- When the work is substantially complete, the contract usually allows a release of most of the retainage, sometimes keeping enough to cover the punch list.
- At final completion and acceptance, the rest is paid, often against closeout documents such as lien waivers, warranties and as-built drawings.
The percentage is set by the contract within the limits of state law. Some contracts reduce it once the job passes a milestone, such as 50% complete.
Example
A $1,000,000 contract with 10% retainage, billed over five months:
| Month | Work billed | Retainage held (10%) | Paid this month | Retainage to date |
|---|---|---|---|---|
| 1 | $150,000 | $15,000 | $135,000 | $15,000 |
| 2 | $250,000 | $25,000 | $225,000 | $40,000 |
| 3 | $250,000 | $25,000 | $225,000 | $65,000 |
| 4 | $200,000 | $20,000 | $180,000 | $85,000 |
| 5 | $150,000 | $15,000 | $135,000 | $100,000 |
By the end, $100,000 of earned money is still owed to you. If your margin on the job is 10%, that retainage is your entire profit.
The federal rules
On federal fixed-price construction contracts, the Federal Acquisition Regulation (FAR) sets clear limits:
- The government makes progress payments monthly (or more often) on estimates of work accomplished.
- If progress is satisfactory, the contracting officer pays in full. Retainage is allowed only when satisfactory progress has not been made.
- Retainage may not exceed 10% of the payment, and the FAR says it should not be used as a substitute for good contract management.
- When the work is substantially complete, the contracting officer keeps only what is needed to protect the government and releases the rest.
- When a separately priced building or division of the work is completed and accepted, it is paid without retention.
- Retained amounts must be paid promptly once all contract requirements are complete.
With each progress payment request, a federal prime contractor certifies that it has paid subcontractors and suppliers from earlier payments, and that the request does not include amounts it intends to retain from subcontractors.
State and private projects follow state law and the contract. Many states cap retainage on public work and set deadlines and interest for releasing it, and some regulate private projects too. The rules differ widely, so read your state’s prompt payment and retainage statutes before you sign.
Federal payment deadlines
The Prompt Payment for Construction Contracts clause (FAR 52.232-27) sets when the government must pay:
- Progress payments are due 14 days after the designated billing office receives a proper payment request.
- Retainage the contracting officer has held is due on the date the contract specifies or, if it does not say, 30 days after the contracting officer approves its release.
- Final payment is due on the later of 30 days after a proper invoice or 30 days after the government accepts the work.
If the government pays a proper invoice late, it owes an interest penalty automatically. Amounts temporarily withheld or retained under the contract do not earn that interest.
Retainage down the chain
A general contractor normally withholds retainage from its subcontractors on the same terms, often with a “pay-when-paid” link to the owner’s release. That creates two balances on every job:
- Retainage receivable: what the owner is holding from you.
- Retainage payable: what you are holding from your subs.
For subcontractors who finish early in the job, such as site work or foundations, retainage can sit unpaid for a year or more until the whole project closes. Some contracts allow early release for early-finishing trades; it is worth negotiating.
Federal rules for paying subcontractors
On federal construction, the prime contract requires every subcontract to include prompt payment terms:
- The prime contractor must pay a subcontractor for satisfactory work within 7 days of receiving payment from the government for it, or owe the subcontractor interest.
- Each subcontractor must pass the same clauses down to its own subcontractors and suppliers.
- A subcontract may still allow retainage: the prime can retain a specified percentage of each progress payment to a subcontractor, as the parties agree, without owing late-payment interest.
- To withhold for a performance problem, the prime must give the subcontractor a written notice stating the amount, the specific reasons and what the subcontractor must do to get paid, with a copy to the contracting officer, then pay within 7 days after the problem is fixed.
- The prime cannot ask the government for money it retained from a subcontractor until it certifies that the subcontractor is entitled to it.
Billing and bookkeeping
Retainage goes wrong in the books in a few predictable ways: it gets lumped into ordinary receivables, nobody bills it at closeout, or the payable to subs is forgotten until a lien notice arrives.
Track it separately, by job:
- On each pay application, show the work completed to date, the retainage held to date and the amount due this period. The AIA G702 and G703 forms are the common format.
- Record retainage receivable as its own account, separate from current receivables, so your aging reports do not hide money that is not yet due.
- Record retainage payable to each subcontractor the same way.
- Keep a list of every open job with retainage outstanding, the expected release date and the documents the release requires.
Bill it. Many contracts require a separate retainage invoice at substantial completion and again at final completion. Put the release dates on your calendar the day you sign the contract.
Know your accounting and tax treatment. Whether retainage counts as revenue when you bill the work or when it is paid depends on your accounting method and contract terms, and the tax rules can differ from your financial statements. Settle this with your CPA so your work-in-progress (WIP) schedule and your tax return both handle it consistently.
Example entries
For the first month of the $1,000,000 job above, with $150,000 billed and 10% held:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | $135,000 | |
| Retainage receivable | $15,000 | |
| Contract revenue (or billings) | $150,000 |
When the owner pays the $135,000, it clears accounts receivable. The $15,000 stays in retainage receivable until you bill and collect it at completion. The subcontractor side mirrors this, with retainage payable as a liability until you release it. Your accountant may use different account names or a different revenue method; the point is to keep retainage separate.
Retainage on the WIP schedule
On a work-in-progress (WIP) schedule, billed retainage is part of what you have billed, even though it has not been paid. Keep a column for retainage receivable by job so the schedule shows how much earned cash is tied up, and make sure your over- and under-billing figures are based on total billings including retainage.
Software that handles retainage
General ledgers can track retainage with separate accounts and classes, but it takes discipline. Construction tools do it on every pay application. In our construction accounting software guide, Knowify adds AIA pay apps, retainage and WIP on top of QuickBooks, and Foundation is built for commercial contractors with retainage and AIA billing in one system.
Getting retainage paid faster
- Negotiate the terms up front: a lower percentage, a reduction at 50% complete, or early release for your scope.
- Finish the punch list fast and document completion with dated photos and sign-offs.
- Collect closeout documents during the job, not after: warranties, manuals, as-builts and lien waivers.
- Send a written retainage release request as soon as the contract allows, citing the clause and any state deadline.
- Follow up in writing and know your lien and bond claim deadlines in case payment stalls.
The bottom line
Retainage is earned money held back until completion, set as a percentage in the contract and capped at 10% on federal fixed-price work. Track receivable and payable retainage by job, bill it on schedule, and know your contract and state rules, because on a typical margin the retainage is your profit.
More for construction: construction accounting software, construction payroll software and certified payroll explained.
Frequently asked questions
What is retainage in construction?
Retainage (or retention) is a portion of each progress payment that the owner withholds and pays only once the work, or a defined stage of it, is complete and accepted. It gives the owner leverage to get punch-list items finished and defects fixed. A general contractor usually withholds retainage from its subcontractors in the same way.
How much retainage can be held on a federal project?
Under the Federal Acquisition Regulation, retainage on fixed-price construction contracts may only be withheld when the contractor has not made satisfactory progress, and it may not exceed 10% of the payment. When the work is substantially complete, the contracting officer keeps only what is needed to protect the government and releases the rest.
Is retainage income when it is billed or when it is paid?
It depends on your accounting method and contract terms, and the tax treatment can differ from your financial statements. Many contractors record retainage as a separate receivable when they bill the work, then clear it when it is paid. Ask your CPA how your revenue recognition and tax method treat it.
Are there state laws on retainage?
Yes. Many states limit how much retainage can be held, especially on public projects, and set deadlines for releasing it after completion, sometimes with interest for late payment. The rules vary by state and by public or private work, so check your state statute and your contract.
Sources and updates
Facts in this article were last checked against the official sources below on . Rules and thresholds change, so confirm anything you act on with the official source or a qualified professional. Spot something out of date? Tell us and we will re-check it. How we work: editorial policy.