Retention is common in commercial construction contracts, but not typical in residential construction contracts. If you feel you need retainage to ensure your contractor will finish the job you've contracted with them to perform, then I suggest you have hired the wrong contractor.

Our company has never failed to complete a project. We won't enter into any contract that includes retainage.

I respectfully disagree. We hired our company because we have confidence they’ll do a good job and hire good subs, but it would be foolish of a client to pay in full before the job is totally finished. Who pays 100% prior to the punch list being completed?

Retention typically means 10% of the amount of each construction draw request is retained until project completion. A contract that doesn't include retention doesn't imply full payment prior to completion of the work. My contracts don't include retainage and my clients don't pay the full contract amount prior to completion.

If you insist on a construction contract with retention in the current market environment, you probably won't be able to attract the kind of contractor you want to work on your home. You will, of course, be able to attract the kind of contractor you don't want working on your project. In that case, the provision for retainage won't do much to protect you. But it will make for an interesting thread here on houzz.com

Well, how are payments structured? We paid invoices at the end of each month, only for work that had been completed. And we received lien releases with each invoice. There was no need to withhold a significant sum but we did not receive the final invoice until all work had been completed.

Ok, maybe I don’t know all the terms. What I’m talking about is withholding a percentage of the total until the job is complete. Retainage?

Retainage typically means 10% of the amount of a construction draw is withheld pending completion of the project. If the amount of contractor's profit is 10%, then the contractor is "whole" at each draw and earns their profit at project completion. 10% profit would be atypical for most custom residential work. That means your contractor would be financing a portion of your project until completion. That's not an attractive proposition in a market where there is more work available than there are contractors to perform it. Proceed with caution.

JJ, what percentage of the total was your final invoice? The schedule is for us to pay monthly invoices, withholding 3% until the punch list is done. My question is, is 3% typical? It seems like a small amount.

On new custom home construction projects, lenders typically want the final payment to be 5% or more of the contract amount. That's a reasonable amount in my opinion. If you or the lender insist on 10% retainage, you simply won't get a quality contractor in this environment.

This is a remodel, paid with cash. It sounds like 5% to 7% maybe? 3% is little enough that anyone could eat it and walk to their next large project. I don’t think our builders would, but we don’t want to be dumb either.

Your builder/remodeler could walk away from your project for any amount of money. Professional builder/remodelers won't walk away until a project is complete. Spend your time picking the right contractor and retainage is moot point. A professional contractor will finish what they start.

We withheld 10% the whole way through. It was paid 30 days after completion. The 10% was placed on a joint account that is, the homeowner, and the builder had to co-sign for. All three of us to sign or no money

Iirc there were 2 "last checks." One was for about 3% of the total. We mutually agreed to withhold $5000 until some cosmetic issues were resolved. Repainting a ceiling, etc.

Adding - I think most established builders value their reputations and are not gonna skip out on finishing a job. Unless maybe something bizarre happens.

@User is latest incarnation of our local shock jock.

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Retainage works very well for its intended purpose and the more retainage you get, the better off you are. Ostensibly retainage exists address any issues, but in reality retainage exists to speed up construction. I don't care how "quality" your builder is or isn't, he will work more diligently towards that carrot at the end.

I believe Architectrunnerguy (originally misattributed to Mark) often says, "the first 90% of your project will take the first 90% of the time, the last 10% of the project will take the other 90% of the time." Retainage is effective at speeding up the project overall, but it is incredibly effective at fixing the above phenomenon because of the goal-gradient hypothesis.

So even holding builder quality constant you will see improved results with retainage.

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Having said that, it doesn't mean you will be better off with more retainage. It means you will be better off by selecting the builder you want and getting that builder to agree to more retainage. If that builder isn't willing to agree to more or even any retainage then there you are.

Retainage customs for residential construction are regional. Some regions use them regularly, others don't. Personally, I don't think you need 10%, I would maybe put feelers out for 5%. In the end, the right builder is more important than the right contract terms, so if 3% is all they will do, don't let that be the reason you move from a great builder.

Good luck

I believe Mark often says, "the first 90% of your project will take the first 90% of the time, the last 10% of the project will take the other 90% of the time."

No, that's me.

@bry911 now that's what I'm talkin' about! Thank you. All good points and gives us something to think about. We have the builder we want, so now to see if we can negotiate slightly higher.

@Architectrunnerguy - Sorry, ARG I corrected it above. I apologize for not checking, I was on my phone so it was a bit difficult to search. BTW it is an absolutely brilliant nugget of wisdom that is applicable to so much more than home construction.

SusanGeorge's moniker is right on. Yeah, I take financial advice from anonymous ppl on the internet. Lol.

Strictly “financially” speaking SusanGeorge is right. But, general financial guidelines have to fit into each person’s “risk profile”. If you are truly satisfied with the builder you have selected, don’t erode confidence at the get go. She/he will either “perform” well or not. But with cash deal, you better clarify what constitutes “complete” up front so payment times don’t become controversial. Most language in contracts use the phrase “substantially complete”. So for small details not completely done, you still “move on”. We don’t use “retention” in our region. In the end, if there are issues for completion you have bigger problems than any retention amount. One more point. Ask the builder for a “typical” payment schedule. It will have 15 or so steps for completion of groups of work. The first 10 will represent around 75% of the total. Things like property survey, ground prep, tree removal, site grading might be first line item. Then Foundation etc. So these are the big ticket items. This schedule will also give you a good idea of “the builder process”. I think that might be helpful.

The builder should have a “typical” milestone payment “schedule”. It isn’t a date type schedule is a “milestone” listing. It sounds like you haven’t done a new build before! I have a “New Build Checklist”. I have developed it over many years working on residential home construction with builders and home buyers. If it could help you, just email me at manganflo@gmail.com
No I am not fishing for clients. I actually have had to turn folks away because I am booked solid. Just want to help. Good luck.

I was just reading through this again, eight months after moving back into our remodeled house. The remodel took 10 months, finishing the punch list looks like it's going to be nine months. So I will agree with: "the first 90% of your project will take the first 90% of the time, the last 10% of the project will take the other 90% of the time." That part has been frustrating.

Regarding the money withheld, I'm not sure if it made much of a difference in the end. We're happy with the design/build firm and how the remodel turned out. I learned a lot and would do some things differently next time. But they've been good about fixing anything that wasn't right. And so many things turned out beautifully. But it's funny to look back on because we were very concerned with budget at the beginning, but as the project gets going, it's easy to add "as long as we're doing this" items. However, I still didn't get my laundry room remodeled. Next year maybe?

@Flo Mangan I think I missed your responses last year, so just wanted to say thank you for the insight and guidance.

"the first 90% of your project will take the first 90% of the time, the last 10% of the project will take the other 90% of the time."

Ha! That came from me. Should I include that in my annual list?

" Should I include that in my annual list? "

Definitely. It holds true in every faction of construction as well, commercial and residential.

Stiley-so happy to have been of some help and that you had a pretty good experience. It is never easy so sounds like you did pretty darn well. Congratulations!! Love to see some photos when you can.