A retainage is an amount earned by but not yet paid to a contractor. This amount is withheld by the client until the completion of a project milestone or the completion of the entire project, to ensure that the quality of the contractor’s work is adequate. If the final inspection finds problems with the contractor’s work, the retainage will continue to be held by the client until the targeted issues have been rectified. Since the amount of retainage (typically 10%) may comprise the entire profit of a contractor, it is considered a powerful incentive to ensure that a project is completed in accordance with the wishes of the client.
A retainage is more likely to be imposed by a client on a new contractor, since there is more uncertainty about the contractor’s performance. Retainage is less likely to be imposed when the client needs to have a project completed within an unusually short period of time. Waiving the retainage clause in a contract is considered a major incentive to entice a contractor to work for a client.