Retainage in Federal Construction Subcontracts: How Much Can Be Held and When Is It Released?

The federal prime-contract benchmark is cause-based

FAR 52.232-5 allows the contracting officer to retain up to 10 percent of a construction progress payment when satisfactory progress has not been made. FAR policy states that retainage should not substitute for good contract management and should be determined case by case.

Official source: FAR 52.232-5 — Payments Under Fixed-Price Construction Contracts.

Subcontracts can negotiate their own retainage structure

FAR 52.232-27 recognizes that construction subcontracts may include negotiated retainage provisions. That does not answer what percentage is commercially reasonable for a particular subcontract or when release should occur; those points should be explicit in the agreement.

Official source: FAR 52.232-27 — Prompt Payment for Construction Contracts.

Price the cash-flow terms, not just the contract value

• Retainage percentage and whether it applies to every progress payment.
• Whether retainage reduces after substantial completion or completion of your scope.
• Whether release depends on Government final acceptance of the entire project.
• Whether the prime can retain more than the Government retains upstream.
• Whether unresolved punch-list items allow retention of a reasonable amount or the entire balance.
• Interest, bond, lien-waiver, and closeout-document conditions tied to release.

Separate retainage from disputed withholding

Retainage is not the same as withholding for defective work, backcharges, setoff, or a disputed invoice. The subcontract should distinguish those mechanisms and require enough notice for the subcontractor to understand why money is being held and what must occur for release.