Winning the Retainage Game

By Denise Norberg-Johnson | May 15, 2002
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If you’ve been in business long enough, you remember when retainage wasn’t standard practice. Now that most general contractors are deal brokers with little of their own money at stake in their projects, they use other people’s money (yours) to improve their own cash flow. So, the first thing the electrical contractor must do is believe the value it adds to a project empowers it to negotiate a fair deal.

If customer still say, “I must hold back some of the money so that the contractors will finish their work,” get rid of them. You won’t make money on their jobs, and you will hate working for them.

It’s your responsibility to educate your customers. Follow the federal government’s example. In 1983, Federal Acquisition Regulation 32.103 stated that: “retainage should not be used as a substitute for good contract management” and that any decision to hold retainage should be based on “the contracting officer’s assessment of any past performance and the likelihood that such performance will continue,” and that “retained amounts shall be paid promptly” upon completion of contract requirements.

So how do you get rid of retainage? First, reestablish trust in your customer relationships.

It’s probably true that the construction industry makes it harder to establish trust in the deals you make. So you’ll have to take one step at a time and practice negotiating. In a negotiation, parties have both positions and interests. The stated position is the assurance of performance. The underlying interest is controlling the cash flow and, since the funds retained from you usually exceed your profit on the project. You must get control of them.

Contractors who negotiate retainage-free deals think like their customers and show them the value of making a fairer deal. With fast track becoming standard, the customer values schedule and quality more than price. So, tie the price to the terms of the deal. Offer the customer more than one price. The lowest is tied to the fairest deal, the highest to the deal containing retainage and the other nightmare clauses you think everyone else is accepting. They’re not.

Second, get rid of the “belt and suspenders” redundancy. If the purpose of retainage is to ensure completion, then offer other assurances, such as performance bonds, a “punch list performance guarantee” or your company’s reputation and historical performance record. If you can’t get rid of retainage, then at least establish the understanding that it is your money and you’re entitled to receive it upon completion of your work. Manipulate the timing of the deal by getting line item release of your retainage on the payout immediately following your completion.

Never accept a higher level of retainage than that being held on other project team members. Better yet, be the only contractor gaining a “retainage exception” advantage. Or, propose direct disbursement to subcontractors and suppliers through an escrow agent, so that the general contractor no longer has the incentive to hold your retainage as an investment. Make sure the approval process contains established steps and deadlines in writing. Watch for “hidden” retainage, including backcharges, unpaid change orders and other forms of slippage in your project cash flow.

Protect your lien rights by filing the appropriate claims. Most states require you to do so to protect your entitlement to collect the retained funds. Remove contingency language regarding final payment and read waiver language carefully. Many partial waivers remove your right to funds not paid, if they are part of the progress payment total on the “waiver of lien to date” and you haven’t received them by that date.

Remove the incentives to use your money as an investment by establishing contractual penalties for late payments (including retainage), insisting on receiving interest on any retained funds and that retained funds are escrowed in accounts assigned only to your company.

Legislation may be effective for removing retainage from contracts, especially at the state level, where more elected officials are business people than are career politicians.

The future holds promise for fairer deals. As customers become smarter, negotiated contracts and design/build allow contractors to provide value engineering earlier, and electronic payment removes the use of “float” from the cash flow stream. The best negotiators are those who are the most valuable to their clients, and a reputation for impeccable performance is the strongest negotiating tool you have. EC

NORBERG is a management instructor with the NECA Management Education Institute, a former subcontractor, and past president of two national construction associations. She can be e-mailed at [email protected].

About The Author

Denise Norberg-Johnson is a former subcontractor and past president of two national construction associations. She may be reached at [email protected].

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