Understanding Retainage: How to Bridge the Payment Gap Without Slowing Down

Retainage is a common practice in the construction industry, where a portion of the payment (typically 5–10%) is withheld until a project reaches substantial completion. While it's meant to protect the client and ensure project quality, for contractors, retainage often creates cash flow headaches that can stall growth, delay new jobs, or even jeopardize the completion of current ones.

In this article, we'll unpack what retainage really is, why it hits contractors so hard, and how smart capital strategies can help bridge the gap.

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What Is Retainage in Construction?

Retainage (or retention) refers to the portion of a contract amount deliberately withheld until work is substantially complete. The standard rate is 5–10%, and it's designed to:

• Ensure contractors complete their work
• Provide funds to address defects or punch list items
• Offer leverage for project owners

You can read a detailed breakdown in this Procore guide to retainage.

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The Real Cost of Retainage

While useful in theory, retainage introduces serious cash flow problems in practice:

• Delayed Access to Earned Income

That withheld 5–10% might seem small—but across multiple projects, it adds up to tens or hundreds of thousands in tied-up capital.

• Pressure on Payroll and Suppliers

Contractors still need to pay crews and vendors on schedule, even when full payment won't arrive for weeks or months.

• Bottlenecks for New Projects

If funds are locked in retainage, you may not have the liquidity to purchase materials or hire staff for the next job.

A U.S. Bank study found that 82% of small businesses fail due to cash flow problems—not profitability.

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How to Bridge the Gap: 4 Smart Strategies

1. Negotiate Better Retainage Terms

Many contractors don't realize: retainage terms are negotiable. Ask for:

• A lower percentage (e.g. 5% instead of 10%)
• Partial release upon milestone completions
• Retainage to be held in escrow or bonded

2. Improve Invoicing and Billing Discipline

• Submit invoices immediately upon milestone completion
• Set clear payment expectations and follow up consistently
• Work with clients to clarify timelines for retainage release

3. Use Short-Term Capital to Bridge Delays

Bridge funding, like what SCG offers, provides capital based on your revenue—not credit—so you can float expenses until retainage is paid.

You can:

• Pay your crews on time
• Order materials for your next job
• Stay ahead of vendor deadlines

Check out this overview of smart construction cash flow tactics.

4. Maintain a Cash Reserve or Credit Buffer

Set aside a portion of each job's payments to handle potential gaps. Even 2–3% of each project budget can build a cushion over time.

Read more about managing reserve strategies in this contractor finance guide.

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Final Word: Retainage Doesn't Have to Hold You Back

It's not going away anytime soon—but retainage doesn't have to paralyze your business.

By pairing smart contract negotiation with fast, flexible capital, you can:

• Avoid costly delays
• Keep operations moving smoothly
• Take on the next job with confidence

At SCG, we help contractors stay liquid and keep building.

👉 Apply for funding or connect with our team to talk through options that match your business model.

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Note: This article is for educational purposes only and does not constitute financial advice. Always consult your CPA or legal counsel for project-specific decisions.