What retainage is
Retainage is a share of every progress payment that has been earned and certified but is not paid out yet. The owner holds it back from the prime contractor. The prime holds it back from its subcontractors. A subcontractor can hold it from a lower tier. It is the same money moving down the same chain, one step behind the work.
It is not a dispute and not a deduction for defective work. The quantities have already been approved. The money is held because the contract says a share of every payment stays with the payer until a condition is met, and that condition is written into the contract: completion, acceptance, a certificate of substantial completion, the close of a lien period. In some states a statute also puts a deadline on it.
"Retention" is the same mechanism under a different word. California's Public Contract Code calls the money "retention proceeds" [3]. Texas's public works chapter calls it "retainage" [2]. Contracts, statutes and accounting software use both words, sometimes in the same document. Read the definition in front of you rather than the label on it.
Two consequences follow from the mechanism. Retainage accrues without anyone asking for it: it comes off every application automatically, so the balance grows through the job. And it is the last money on the job, which means the release terms, not the rate, decide how long your cash is tied up.
Where the percentage comes from
The contract sets the percentage. That is the first place to look: the payment article of the prime contract, and then the same article of your own subcontract. The rate the owner holds from you and the rate you hold from your subs are set by two different documents, and they do not have to match.
AIA's guidance for its payment application puts the hierarchy in one sentence: "Retainage requirements come from the contract documents and may also be affected by applicable law." [7]
The second place to look is the statute. Where a state caps retainage, the cap is a ceiling: a contract can set a rate under it, and the statute is what stops a rate above it. The contract's number and the statutory number are two separate things, and the lower one is what governs the money. In both states below, public work and private work are written into separate sections of the code, so the first question is always which kind of contract you are holding.
The rate is not always one figure across the whole application either. The AIA guidance tells the preparer to "Confirm whether the project uses a fixed or variable approach, which work or materials are subject to retainage, and whether any reduction has been approved." [7] Stored materials, labor and particular scopes can be treated differently from installed work: "If labor, stored materials, or specific scopes receive different treatment, apply and verify each group separately." [7]
Check the rate against two documents, not one
A rate you owe downstream that is lower than the rate held upstream is money you are financing out of your own account for the length of the job. Compare the retainage clause in your subcontract with the retainage clause in the prime contract before you sign either.
How it lands on a pay application
On projects that use the AIA forms, retainage appears as a deduction on the summary sheet. The G702 "Application and Certificate for Payment is the contractor's application for payment and the architect's certificate for payment." [7] The G703 "Continuation Sheet organizes the schedule of values and line-item detail supporting those totals." [7]
The continuation sheet carries the detail line by line. For each line of the schedule of values you "Enter or confirm the description of work, scheduled value, work completed from previous applications, work completed this period, materials presently stored, and the balance to finish." [7] The summary sheet then reconciles the job: "Confirm the original contract sum, net change by change orders, contract sum to date, completed and stored work, retainage, previous certificates for payment, and current payment due." [7]
The arithmetic runs in one direction.
work completed to date + materials presently stored = total completed and stored to date total completed and stored to date − retainage = total earned less retainage total earned less retainage − previous certificates for payment = current payment due
Two points in that chain decide the check. Retainage is taken on the cumulative total, not on this period's work alone, so the retainage line on each application is the running balance held to date. And previous certificates are subtracted after retainage, which is why an error in the retainage rate repeats on every application until someone reconciles the job.
The table below runs the chain on a labeled example. Every figure is an input you replace with your own.
| Line | Example figure |
|---|---|
| Original contract sum | $250,000 |
| Work completed to date | $100,000 |
| Materials presently stored | $8,000 |
| Total completed and stored to date | $108,000 |
| Less retainage at this example contract's 10% rate | $10,800 |
| Total earned less retainage | $97,200 |
| Less previous certificates for payment | $60,000 |
| Current payment due | $37,200 |
The 10% in that example is the rate this example contract sets. It is not a legal rate, not a standard, and not a figure to carry to another job. Our retainage calculator runs the same chain with your own contract sum, rate and prior payments.
When the same rate does apply to several lines, the AIA guidance describes handling them as a group: "When the same retainage rate applies to several G703 line items, use the checkbox column to select the rows." [7] It also warns against the opposite habit: "Applying one retainage rate to rows governed by different contract requirements." [7]
Two state examples
Texas and California are the two states this guide carries verified records for. They are two different regimes, and neither one is a national rule.
Texas, private work. Chapter 53 of the Property Code requires the owner to reserve a share of the contract price during the work and for a period after it.
During the progress of work under an original contract for which a mechanic's lien may be claimed and for 30 days after the work under the contract is completed, the owner shall reserve: (1) 10 percent of the contract price of the work to the owner; or (2) 10 percent of the value of the work…Tex. Prop. Code Sec. 53.101 · Archived copy of the official text, captured 2025-08-13
That is 10 percent, held during the work and for 30 days after the work under the contract is completed [1]. It is written as a duty on the owner to reserve funds, not as a cap on what the owner may withhold.
Texas, public work. The Government Code takes the other shape: a ceiling that steps down with the size of the contract.
(1) if the total value of a public works contract is less than $5 million, a governmental entity may not withhold retainage in an amount that exceeds 10 percent of the contract price … (2) if the total value of a public works contract is $5 million or more, a governmental entity may not withhold retainage in an amount that exceeds five percent of the contract priceTex. Gov't Code Sec. 2252.032 · Archived copy of the official text, captured 2025-12-18
So on Texas public works the ceiling is 10 percent below $5 million and five percent at $5 million or more [2]. Those ceilings do not apply to a contract whose total price estimate at signing is under $400,000 or to a TxDOT contract under Transportation Code chapter 223, and on a contract for the construction or maintenance of a dam, retainage may not exceed 10 percent whatever the contract's value [2].
California, public work. The Public Contract Code caps retention at each tier of the chain and caps the total.
The retention proceeds withheld from any payment by a public entity from the original contractor, by the original contractor from any subcontractor, and by a subcontractor from any subcontractor thereunder shall not exceed 5 percent of the payment. In no event shall the total retention proceeds withheld exceed 5 percent of the contract price.Cal. Pub. Contract Code § 7201(b)(1) · official text · retrieved 2026-09-23
That is 5 percent of the payment and 5 percent of the contract price, and it binds every tier: public entity to prime, prime to sub, sub to sub-sub [3]. The section applies to contracts entered into on or after January 1, 2012 [3].
When retainage has to be released
The rate decides how much is held. The release rule decides when you see it, and that is the clause worth reading first.
In Texas, the private-work reserve runs during the work and for 30 days after the work under the contract is completed [1].
In California, public work has a deadline and a limit on what a dispute lets the entity keep back.
Within 60 days after the date of completion of the work of improvement, the retention withheld by the public entity shall be released. In the event of a dispute between the public entity and the original contractor, the public entity may withhold from the final payment an amount not to exceed 150 percent of the disputed amount.Cal. Pub. Contract Code § 7107 · official text · retrieved 2026-09-22
Sixty days after the date of completion, and in a dispute no more than 150 percent of the disputed amount held from the final payment [4]. That second sentence lets the entity protect a contested item without freezing the rest of the retention.
California private work runs on a shorter clock.
If an owner withholds a retention from a direct contractor, the owner shall, within 45 days after completion of the work of improvement, pay the retention to the contractor.Cal. Civ. Code § 8812 · official text · retrieved 2026-09-22
That is 45 days after completion of the work of improvement, owner to direct contractor [5]. The section was added by Stats. 2010, ch. 697 (SB 189) and became operative July 1, 2012 [5].
California attaches a price to withholding that money wrongfully on private work. Section 8818 sets a penalty of 2 percent per month on amounts wrongfully withheld, in place of any interest that would otherwise be due, and provides that the prevailing party in an action for the collection of those funds recovers costs and reasonable attorney's fees [6].
Whether a given payment is late under any of these sections turns on when completion occurred, what your contract defines as completion, and whether the withholding is disputed. This guide states the rule; it does not decide your case. Read the section and your contract together, and take the question to your own counsel.
Where this varies by state
Retainage caps, release deadlines and penalties are state law, and they change twice over: from state to state, and inside a single state between public and private work. Texas caps public retainage by contract value [2] while writing the private rule as a duty to reserve [1]. California caps public retention at 5 percent [3] and sets a 45-day private payment deadline with a 2 percent per month penalty behind it [5] [6]. Neither pattern predicts the other.
This guide carries verified records for Texas and California only. Other states cap retainage at a different rate, cap it on public work but not private work, require it to be reduced at substantial completion, or require it to be deposited in escrow. Our state records live at /states/. The retainage-laws dataset there records each state's cap, deadline and penalty with the statute citation behind it, as each one is verified.
Until you have read your own state's section, treat every figure above as a Texas or a California figure. Then read your contract, because the contract can hold back less than the statute allows and can set its own release conditions on top.
Frequently asked questions
What is retainage in construction?
Retainage is a share of each progress payment that has been earned and certified but is held back until the work is finished and accepted. The owner holds it from the prime contractor, and the prime holds it from its subcontractors. The contract sets the rate and the release terms, and a state statute may cap the rate or set a deadline for release.
How does retainage work in construction?
It comes off every application for payment: completed work plus stored materials, less retainage, less previous certificates, equals the payment due. The withheld amounts accumulate through the job and are released when the contract's condition is met, or by the deadline a state statute sets. Check your own contract and your state's statute for both the rate and the release trigger.
What is retainage in accounting?
In the books it is money that has been earned and billed but not yet paid: the party holding it carries a retainage payable, and the party waiting for it carries a retainage receivable. Because it is earned revenue that has not converted to cash, it belongs in a cash-flow forecast separately from ordinary receivables. How you record and recognize it follows your own accounting method. Confirm the treatment with your accountant.
Retainage vs retention
They name the same mechanism: money held back from progress payments until a release condition is met. Statutes and contracts differ on which word they use: California's Public Contract Code says retention proceeds, while Texas's public works chapter says retainage. Go by the definition in the document, not the word on it.
Related
- Retainage calculator: enter the contract sum, the rate and prior payments and see the amount held and the payment due.
- State records: per-state records, including the retainage-laws dataset as each state's cap, deadline and penalty is verified.