Retainage, or "retention" as it is sometimes called, is a financial quirk found only in the construction industry that causes unnecessary financial distress for any party on which it is imposed: general contractors, subcontractors, sub-subcontractors and so on. The rationale behind holding an amount of money from a contractor until its work is finished, and only then paying all the money that is owed, may sound like a good way of assuring the outcome you want, but the facts just don't bear this argument out. The ironic and sad thing about retainage is that it often has exactly the opposite effect.
Few subcontractors feel retainage is what gets them to return to complete a job. The reason is that many contractors wait months or even years to receive the balance owed to them, whether they completed their portion of the work two months or 10 months into the project. In other words, many contractors are not paid retainage owed to them even if they have completed their work and it was properly performed. They are paid much later. Retainage provides little, if any, incentive to complete work. Even worse, retainage can cause serious cash-flow problems for contractors who need the 5, 10 or 15 percent that is owed to them to pay their employees and suppliers. In fact, subcontractors say they would, on average, be able to discount their prices by 3 percent if they didn't have to worry about fighting to receive retainage.
In other words, retainage, as the practice exists in the construction industry, (a) does not function as a security for owners, general contractors or subcontractors; and (b) diminishes the contractor's efficient operation by unnecessarily tying up capital.
Sound far-fetched? Try to think about retainage this way: Imagine how your dentist would react if you told him or her, prior to an appointment, that you were not planning on paying the full amount of the bill until you were convinced the dental work was "defect-free." That kind of policy just wouldn't work. Dental patients do not hold part of their payments as a way of holding the dentist accountable; the law or insurance protects them. Dentists wouldn't stand for an arrangement that indefinitely ties up their money in patients' bank accounts. The dentists want to spend the money on equipment or salaries.
The position of contractors is not very different. The law and surety bonds protect owners and prime contractors when a contract specifies what work their subcontractors will perform, and when. Yet in the construction industry, the practice of the customer holding back funds until work is determined to be "defect-free" functions in exactly the way described in the dentist example. The only difference is that the "dentist" is a subcontractor or prime contractor and the "patient" is a prime contractor or owner, respectively. Unlike the worried dental patients, however, many prime contractors and owners show up for their "appointments" still expecting subcontractors or prime contractors to perform work with a smile.
There are alternatives to retainage. Many subcontractors are willing to provide warranties or furnish performance bonds to guarantee their work, adding to the legal protections that owners and prime contractors have under the law. These vehicles, unlike retainage, provide real security without financially hampering contractors.
Julian Arhire is a Manager with DtiCorp.com - DtiCorp.com carries more than 35,000 HVAC products, including industrial, commercial and residential parts and equipment from Honeywell, Johnson Contols, Robertshaw, Jandy, Grundfos, Armstrong and more.
