Retainage (or retention) is a share of each payment on a construction contract that the owner or general contractor holds back until the project, or a defined phase, is complete. It gives the payer leverage to make sure the work is finished and defects are fixed.
How it works in factoring
Retainage affects factoring in two ways:
- The retained amount is usually not factorable. It will not be paid until project completion and acceptance, which may be months away and can be reduced by punch-list disputes or back charges.
- The current portion of each invoice can be factored. Factors that work in construction typically fund only the amount currently due under a progress billing, net of retainage.
Illustrative example: A subcontractor bills $50,000 for work completed this month under a contract with an assumed 10% retainage. The general contractor will pay $45,000 now and hold $5,000. A factor would consider funding against the $45,000, not the full invoice.
Rules on retainage vary. Many states limit how much can be held on public or private projects and set deadlines for releasing it. Federal construction contracts have their own retainage guidance in the Federal Acquisition Regulation.
What to check
- The retainage percentage and release conditions in each contract
- State law limits that may apply to your project
- Whether your factor tracks retainage separately on its reports
- Lien waiver and pay application requirements, which affect when funds flow
Tracking retainage separately helps avoid overstating how much financing your receivables can support.