Retainage (sometimes called retention) is a portion of each progress payment that the owner withholds from the contractor as security for project completion. Typical retainage rates are 5 to 10% of each progress payment on commercial work, lower on residential, and may be reduced at substantial completion (e.g., from 10% to 5%) and fully released at final completion or after punch list closure.
Retainage is intended to ensure that the contractor returns to complete punch list items, address warranty issues, and resolve any final-payment disputes. From the contractor's perspective, retainage is unfunded receivable that strains working capital. Many states have laws limiting retainage rates, requiring early release, or imposing interest on late retainage release. Contractors typically pass through retainage to subcontractors at the same rate the owner imposes.