I propose that this industry’s definition and continued practice of withholding retention is an outdated concept.  With the changes in payment practices, retention is no longer the safeguard it was designed to be; it is now merely another “cost of capital” arrow in a quiver of inequities.

Retention was designed to be a form of contingency for owners in a time when monthly applications for payment were prepared off a twenty-line-item list of descriptive work items and roughly approved by the architect of record and timely submitted to the owner with expectations for payment to be made ten days into the next month.  The subcontractors involved in a project would estimate the value of their materials and labor put in place through the end of the month–and the general contractor would combine all invoice submissions into one completed AIA application and withhold an extra 10% right off the top.

This 10% retainer was meant to protect the GC and the owner from the inaccuracy that inherently comes with estimating…or guessing.  It was also a contingency/safeguard for the GC and owner in that one never quite knew for sure that all work put in place was compliant with the contract documents.  The retainer would help ensure that the parts and pieces installed would work for all purposes intended when it was time to be tested, which understandably could be months down the road.

Since payments for work performed were routinely paid by the tenth of the month following the submission of the application for payment, the 10% retention was a reasonable contingency and an accepted process for all.

Our current practice today is to expect the GC and the various trade contractors to continue working, continue incurring costs, continue investing their money into an owner’s project for another thirty, forty-five, sixty, or 90 days before payment is made for their first payment application, which is typically a small percentage of their total contract amount. 

In many cases by the time the trade contractor receives their first progress payment, they have completed the entirety of their contract scope.  The only business reason for retention at this point is to protect against non-compliant work.  The guessing game as to the level of progress at the ending of any one month is no longer an issue as all work is in place, or certainly at least substantially increased, at the time of actual payment. 

For an owner or GC to withhold 10% of a trade contractors first progress billing, when they do not issue payment until thirty to sixty (or more) days later and the entirety of the contract scope is now substantially or near complete at the time of this first payment, is an insult to the contractor performing the work.  The only reasonable business reason for an owner to withhold 10% is “they can” and the general contractors and the trade contractors “let them.”

I propose that a reasonable alternative, which I have seen in owner contracts, is for an owner to not withhold retention of any amount and instead to include a line item in every trade payment breakdown that places a value of 5% (or a mutually agreed percentage) of the contract amount to cover final documents such as final as-built drawings, manufacturer guaranties, final warranties, final lien waivers, and to only pay against that value when all final documents have been submitted and approved.  If there is any question or valid concerns as to performance, that protection can be managed through the approval process of the various items within the trade payment breakdowns of the various trade contractors.

A 10% retainer withheld from a trade contractor represents the total value of the profit and overhead earned on that project—and that is if the trade contractor performed within their initial estimate.  This would mean that the business owners are unable to realize any salary for themselves, any funds to pay office expenses, and any funds to invest in their next project, until the entire project is complete and the owner decides to pay.  This often leads to months, and even years for trade contractors to wait for their meager profit and overhead.

There was a time in our industry where it was totally unacceptable by all parties that all contractors participating in a major commercial project were not paid for their monthly payment application by the time—usually well before—they sat down to prepare their next months payment application.  In today’s business climate that never happens; the owners withhold payment often through multiple months causing havoc and financial strain for literally all major players in a project.  And then, to add insult to injury and injury to insult, a 10% retainer is cut right off the top.

In addition, it seems that there is increased scrutiny in reviewing the trade contractor’s monthly payment applications for accuracy, even knowing that it will take months before they are actually paid.

A major commercial construction project involves big dollars and to make it work for all parties involved, those dollars need to timely flow down to the trade contractors that are incurring the costs.  Waiting forever to pay monthly bills and then to withhold 10% from those bills is an unworkable procedure and this concept of withholding retention should be revisited by the leaders of our industry and adjusted immediately.

Times change, procedures change, the value of construction projects have increased substantially.  Let’s take a serious look at this retention issue and make it work for the current times.