You Finished the Job. So Why Don’t You Have the Money?

By JOE NORTRUP

You did the work, you delivered and someone else is holding your profit as a free loan. This quiet frustration is universal in the trades, and it deserves a voice and a conversation.

Everyone in construction lives with retainage, but hardly anyone is writing about it as the systemic financial weapon it has become. It’s accepted as “just how it works,” but that acceptance is exactly the problem. And it’s why this conversation is necessary.

The Pain: This Ensconced Contractual Provision Does Not Math

As an example: a contract for $500,000 with a provision for 5 percent retainage holds back $25,000. If the contractor’s profit margin is at 7 percent ($35,000), the retainage provision requires the lion’s share of the profit for that job to be held back.

Mind you, this is on work already performed, inspected and made payable via a processed pay app. But “just in case, we’re going to hold back 5 percent of the pay app’s value.”

And today, with a lot of contractors operating on margins as thin as 2 percent to 5 percent, it means that in many instances, retainage can literally exceed projected profit.

Delayed Payment Processing: The 1 – 2 Punch

When you couple retainage with another huge issue plaguing contractors – “The Delayed Payment Conundrum” – it creates a 1-2 punch that regularly forces contractors out of business or to borrow money at significant cost to bridge the gap. When you consider just these two very negative factors, it’s a wonder why anyone would think the trades and contracting make for good business.

I have written on the delayed payment issue in construction before, but to give a brief reminder:

The average general contractor now waits 83 days to get paid. Meanwhile, crews need to be paid every two weeks, material suppliers want payment in 30 days, and equipment doesn’t care that receivables are stuck in approval limbo.

Only 5 percent of subcontractors get paid on time. Eighty-two percent of contractors face payment waits of more than 30 days, up from 49 percent from just two years ago. And here’s the kicker: 97 percent of general contractors increased their bid prices in 2024 specifically to account for payment delays.

A $5 million company doing projects with 10 percent retainage could have $300,000 to $500,000 in completed, earned revenue sitting locked up at any given time.

That’s money for work already done, already delivered, just held.

The Hidden Ripple Effect

Retainage reduces immediate cash availability at every tier of project delivery. When an owner withholds from a GC, that pressure transfers to subcontractors and suppliers. Each tier then carries completed work as unpaid receivables, often for months.

The practice has been particularly criticized for its disproportionate impact on small and minority-owned businesses, which may lack the financial resources to absorb the cash flow impact of withheld payments.

Solutions? Some Changes are Occurring

There are some grumblings of reform in some states. California recently passed a bill limiting retainage to 5 percent on private construction projects, bringing private work in line with public projects that cap retainage at 5 percent.

Meanwhile, what can you do as a GC or subcontractor? Don’t wait for the law to catch up; start negotiating better contracts now.

Legal Argument for and Against Retainage and Question of Ethics

The legal precedent supporting retainage is old and relatively straightforward:

• Incentive to Complete – Courts have historically upheld retainage as a legitimate mechanism to ensure contractors don’t abandon projects near completion.
• Owner Protection Against Default – Retainage viewed as a contingency for owner’s ability to fund the hiring of another contractor, should the original contractor default. Courts have generally recognized this as a reasonable risk management tool.
• Defect Warranty Period – Retainage held specifically to cover defects discovered after completion, providing the owner with leverage to compel the contractor to complete warranty work.
• Freedom of Contract – Perhaps the strongest of legal arguments. Both parties signed the agreement freely.

The Case Against Retainage:

• Unjust Enrichment – When an owner withholds earned payment for completed, inspected and accepted work, it is deriving value form that work without full compensation.
• The Free Credit Argument – Critics contend that modern bonding, insurance and legal remedies provide adequate protection for project owners without requiring contractors to extend free credit.
• Cascading Harm – Retainage flows down the entire contractual chain. An owner withholds from a GC, the GC withholds from subcontractors, who may have to withhold from their suppliers. This essentially imposes the most financial pain on the party with the least amount of financial power to give added protection to the party with the most financial power and who has layers of protection in addition to retainage.
• Contractual Spirit – Contract law recognizes not just the letter of an agreement, but also its implied covenant of good faith and fair dealing. The argument: If an owner accepts completed, conforming work, scope by scope, approves each pay application and acknowledges that the deliverable meets spec., withholding payment on accepted work may violate that implied covenant.
• Bid Inflation Paradox – 97 percent of GCs increased bid prices in 2024 to compensate for delayed payment, meaning that the owner’s “protection” actually cost it more in inflated contract prices.

If we’re being intellectually honest, we can frame retainage like this: Retainage is not inherently illegal, but the way it is routinely practiced – held long past accepted completion, used as leverage in unrelated disputes, cascaded down to the most financially vulnerable parties – frequently crosses the line from legitimate risk-management into bad faith financial coercion.

Joe Nortrup is a sales and marketing specialist at Kelly Construction Group, LLC.