Construction retainage rules: how much can be held and when it is due
Retainage is money an owner or contractor holds back from each progress payment until the work is done. How much can be held, and when it must be released, depends on your contract, the type of job and the state. Federal work, California private work and a typical subcontract each follow different rules, so read the clause before you assume a number.
What is retainage?
Retainage, also called retention, is a percentage withheld from each pay application. It gives the party paying a cushion if work is left unfinished or defective. For a subcontractor, it is earned money that sits unpaid, sometimes for months after your crew leaves the site.
Your retainage line shows up on the pay application. If you want a walk-through of that form, read our guide on G702 and G703 mistakes. This post is about the rules behind the number.
What are the federal retainage rules?
On federal fixed-price construction contracts, the standard clause is FAR 52.232-5. It lets the contracting officer retain a maximum of 10 percent of a payment when satisfactory progress has not been made, and only until progress is satisfactory. When the work is substantially complete, the officer may keep an amount considered adequate to protect the government. The clause also says the government must release the remaining withheld funds to the contractor.
Notice what that clause covers. It governs the government’s payments to the prime contractor. It does not set your retainage as a subcontractor. That comes from your subcontract.
What does federal law say about retainage on subcontracts?
The Prompt Payment Act’s construction provision, 31 U.S.C. 3905, is the place to look. It says the parties may agree that the prime or a subcontractor can retain, without cause, a specified percentage of each progress payment. Retainage agreed in the subcontract does not trigger a late-payment penalty.
Other withholding is more limited. A prime may withhold part or all of a subcontractor’s payment under the subcontract terms, but it avoids the late-payment penalty only if it gave the subcontractor a written notice first and sent the government a copy. That notice must state the amount withheld, the specific causes under the subcontract and the steps the subcontractor must take to be paid.
If the prime learns of a problem after it applies for payment, the same section says it must pay the subcontractor within 7 days of the correction, or within 7 days after the prime recovers the funds from the government, or owe an interest penalty. Read the statute for the details of who owes what.
Is there a cap on private jobs?
Rules differ by state, and the contract often controls. California recently added a cap. Holland & Knight reported in April 2026 that retainage on California private projects is limited to 5 percent of the contract price under Civil Code section 8811. Key points from that alert:
- It applies to contracts signed on or after January 1, 2026. Older contracts with higher retainage do not need to change.
- A contract clause allowing more than 5 percent is unenforceable.
- A direct contractor cannot hold more from a subcontractor than the rate agreed between the owner and the direct contractor, and the same applies down the tiers.
- Withholding above the cap or paying retainage late can bring a 2 percent per month penalty and fee-shifting to the prevailing party.
- There are exceptions, including one for a subcontractor that fails to furnish a required bond after advance notice at bid, and one for certain residential projects.
Check whether your state has its own retainage statute for the job type. Look up your state’s rules on the legislature’s website, and ask a construction attorney how they apply to your contract.
Which contract terms decide when you get paid?
Because the statutes mostly set limits, your paperwork sets the timing. Before you sign, find these terms:
| Term to find | Why it matters |
|---|---|
| Retainage percentage | The base number. Check if it differs for you and for the prime. |
| Step-downs | Some contracts reduce the rate at a milestone. The G702 math must follow them. |
| Stored materials | Is retainage applied to them, or not? |
| Release trigger | Substantial completion, final completion, owner payment or a punch list. |
| Pay-when-paid or pay-if-paid | Whether your release waits on the owner paying the prime. |
| Release request steps | Notice, final waiver, closeout documents. |
Keep your own tracker of retainage held, by job and by pay period. A running balance shows what you are owed when it is time to ask.
How do lien waivers affect retainage?
Releasing retainage often comes with a final lien waiver, and the form matters. A waiver signed too early can give up rights before you are paid. See our explainer on conditional vs unconditional lien waivers before you sign one at closeout.
A short checklist
- Write down the retainage percentage, step-downs and release trigger for each job.
- Check whether your state caps retainage for the job type.
- Compare your retainage rate with the prime’s rate if your state limits yours to the prime’s rate.
- Track the held balance every month.
- Ask for release in writing as soon as the trigger is met.
- Use a conditional waiver until payment clears, and sign an unconditional waiver only for money you have received.
Where Payrung fits
Payrung is being built to apply each contract’s retainage rules to your schedule of values, keep a running held balance by job, and prepare the pay application for you to review. Join the waitlist.
This article is general information, not legal advice. Retainage rules vary by contract, job type and state, so check your contract and ask a qualified construction attorney.