Retainage Management Collection Example
Progress Billing for a General Contractor
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Work in Progress
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What is retainage? What is a retainage fee? In the contracting business, vendors define retainage as a portion of the payment that is withheld until the completion of a project. The client doesn’t pay the contractor the retainage until all work on the project is complete. Retainage defined the risk clients take when paying contractors. Its result is a protection for their money, time, and other resources.
Retainage is negotiated upfront and is stated as a percentage of the overall cost of the project. A common retainage amount is 10%. Retainage incentivizes the contractor to provide quality work up until the very end of the project. As a deal-sweetener, or for small scale projects and rushed jobs, a client may offer to forego the retainage percentage to a familiar and reputable contractor. The retainage definition can vary somewhat depending on industry and company focus.
Similar to accounts receivable
and other forms of trade credit
, an uncollected retainage receivable is essentially an interest-free loan with a cost equal to the cost of financing current assets
and the time value of money.
Therefore, from the contractor’s perspective, a shorter collection period is optimal. Typical collection periods for retainage accounts receivable can be as long as 6 months or as short as 45 days. Consistently collecting retainage from clients within 90 days of project completion is considered very efficient. A retainage reduction is surely needed if collection occurs beyond the marker of 6 months.
Retainage Collection Hurdles
Typically there are three steps to complete before the contractor can collect retainage. These three steps are: completing the punch list, putting together the close-out package, and submitting the retainage invoice.
A punch list is a list of minor details and leftover items related to the project. The bulk of the project may be complete, but small tasks may remain unfinished. For instance, a punch list may include an unpainted portion of a ceiling, faulty wiring for a light bulb, or a problem with plumbing. The client will not pay the retainage until these minor items have been taken care of, so this is an important step to complete in speeding up the collection of retainage.
The close-out package is a collection of documents related to the project. Some clients, especially in the medical field, expect a close-out package prior to paying retainage. The close-out package consists of copies of legal documents, liens, warranties, certificate of occupancy, test results, operations and maintenance manuals, and other relevant paperwork and documentation. These documents must be gathered and sent to the client in a timely manner to ensure prompt payment of retainage.
And finally, it is important to submit the retainage invoice to the client as soon as possible after all other necessary steps have been completed. Prior to submitting the retainage invoice, all subcontractor pricing must be finalized.
Three Steps for Retainage Collection
1. Complete the punch list
2. Assemble the close-out package
3. Mail the retainage invoice
Certain matters can complicate retainage negotiations, retainage collection, and retainage release. These issues can arise from change orders and arrangements with subcontractors.
Often, over the course of a contracted project, the client will request changes to be made that deviate from the original project plans. For instance, in a construction project the client may request a wall to be moved, windows or doorways to be altered or relocated, or other features to be added or changed. These change orders inevitably add to the cost of the project as a whole and change the amount of the retainage.
Getting pricing in from all subcontractors on additional work can be difficult. A project manager must rely on subcontractors to submit pricing in a timely manner so that the final progress billing and retainage billing can be generated. Oftentimes pricing can snowball at the end of a project.
A dedicated project manager will be pro-active with regards to pricing from subcontractors, so that he may invoice the retainage as soon as possible after the project is completed.
Retainage bonds further confuse the matter, with needs varying by location and governing body. Generally, some kind of retainage bond must be filed with the local municiplaity. Amounts and requirements are subject to the preferences of local government. Make sure to consult an expert when filing for any type of payment bond.