Managing retainage on construction projects

When it comes to construction credit, there is nothing more critical, or complex, than contracts. With so many unique terms and contract language shaping each project, it is important that credit professionals know what’s headed their way at the onset.

Why it matters: Retainage, or retention, is when a portion of the contract price is withheld until the completion of the project. While fairly common in the construction industry, it is important that credit managers know how to manage risk on projects employing retainage to protect their company from losses down the line.

How often a credit manager encounters retainage depends on what types of projects they routinely work on. “It tends to come up more often on larger commercial, civil, infrastructure, public or quasi-public projects where the general contractor is flowing down the owner’s terms,” said Ty Knox, ICCE, director of credit and risk for EFCO (Des Moines, IA). “It’s also more common when dealing with customers who use standardized subcontract forms and try to apply the same retainage language to every trade, regardless of scope.”

Retainage alters the credit process because it creates a balance that will remain unpaid even after a company’s involvement in the project has ended, tasking the credit team with tracking the current receivable and the retained balance.

“The biggest operational difference is that retainage cannot just sit on the aging report as if it were a normal past-due invoice,” Knox said. “It needs its own follow-up process. The credit team needs to know when their company’s work is complete, when equipment has been returned, whether there are disputes, whether final billing has been submitted and what documents are required to release the retainage.”

Managing retention can be a prolonged process, with certain projects spanning years. “It’s a matter of keeping tabs on all the players on the job, which can change as the person you talk to today might not be with the company tomorrow,” said D’Ann Johnson, CCE, corporate credit and contracts manager for A-Core Concrete Cutting (Salt Lake City, UT). “We touch base each month as the project continues. Sometimes we’ve been successful asking, ‘Hey, I understand the project’s still ongoing, but our scope of work has been done for six months. Is there any way we can get our retention so we can close our books on this?’”

With longer projects that may involve several phases, it is important to make sure that the percentage of retainage on the project is consistent across all purchase orders. “We’ve had projects that start out at 3% retention, and then somewhere down the line someone within the company signs a document accepting 5%,” Johnson said. “So, the credit manager needs to communicate with departments responsible for signing purchase orders to make sure any changes to retainage aren’t accepted. If at any time they see an order come through that has changed the amount, they need to be on the phone with the customer asking what happened.”

Depending on what your company provides on a construction project, it may be possible to push back before signing the contract. “We are a material supplier, so if we do see anything referencing retainage in the contract, we don’t proceed until it is removed from the documentation,” said George Demakis, corporate credit and pricing manager for Stone Group (Spokane, WA). “But there are a few times we have still benefited from retainage being on a project. In several situations where our subcontractor was paid by the general contractor, but failed to pay us for the material, we have reached out to the general contractor. The presence of a retainage balance due to our customer (the subcontractor) has allowed the general contractor to pay us the amount due and withhold the retainage from the subcontractor.”

By working closely with the contracts department, credit managers can take a proactive approach to managing retainage on a project. “I also work in the contracting department at my company, so I am able to influence what those contracts look like on the front end,” Knox said. “If you don’t have that luxury, be sure to make friends with your contract manager and start working with them directly so you can be aware of any unique terms that might affect the credit department downstream.”

The bottom line: Retainage, like many aspects of construction credit, will only pose risk to credit managers who don’t know how to manage it. Staying on top of ongoing projects and building bridges within your company so there is a widespread, thorough understanding of the conditions each project is conducted under is critical.