How to Calculate Retainage in Construction

Retainage is withheld money governed by the contract

Retainage, sometimes called retention, is the portion of an otherwise earned progress payment that is held back under the contract. Owners and prime contractors may use it as part of the payment structure while work is being completed, deficiencies are corrected, closeout documents are collected, or other contract conditions are satisfied.

There is no universal 5% or 10% rule for every private, public, state, or subcontract project. The contract, amendments, incorporated payment terms, applicable law, and project type control the rate and release process. Treat the percentage as an input to verify—not as a default legal answer.

AIA G702 and G703 provide a common payment-application structure. G702 summarizes the application and G703 carries the line-item detail, but the project’s actual contract and required form edition control what may be billed, retained, released, or supported.

The basic retainage formula

For a simple progress-payment scenario, period retainage equals the eligible amount for the period multiplied by the retainage rate. Eligible amount may include current-period work and stored material when the contract permits both. Net current payment then starts with the earned amount, subtracts current and cumulative adjustments required by the form or contract, subtracts retainage as applicable, and subtracts previous payments or certificates as the summary requires.

Example: if eligible current-period work is $40,000 and the contract retainage rate is 5%, current retainage is $2,000. The amount requested for that portion before other deductions is $38,000. If the contract treats stored material differently, calculate the work and stored-material portions separately rather than applying one rate automatically.

The formula is simple; the eligibility decision is not. Confirm whether retainage applies to stored materials, approved changes, bond premiums, mobilization, deposits, taxes, or other line items. The contract administrator’s instructions control.

• Eligible period amount × retainage rate = period retainage.
• Earned-to-date amount − cumulative retainage − previous payments = current summary amount, subject to the form and contract.
• Balance to finish = scheduled value − completed and stored to date.
• Release amount = retained balance released under the contract’s approved milestone or closeout process.

A three-period worked example

Assume a $100,000 subcontract with a 5% retainage rate and no approved changes. In month one, $20,000 is earned; $1,000 is retained and $19,000 is eligible for payment before other deductions. In month two, another $30,000 is earned; $1,500 is retained, bringing cumulative retainage to $2,500. In month three, $25,000 is earned; $1,250 is retained, bringing cumulative retainage to $3,750.

The project has now earned $75,000, with $3,750 held as retainage. The current application must still reconcile previous certificates, current work, stored material, adjustments, and the contract’s exact G702/G703 presentation. The example demonstrates the arithmetic; it does not determine whether the contract allows a reduction or release at this point.

If the contract later authorizes a release of some retained money, record the approved release as a separate event and preserve the approval. Do not silently change the rate on earlier applications or rewrite history to make the current application balance.

Stored materials need their own eligibility check

Stored materials may be billable under some contracts and restricted or excluded under others. A reviewer may require evidence of delivery, ownership, storage location, protection, insurance, invoices, inspection, and the absence of prior billing. Retainage may also be treated differently for stored material and installed work.

Do not include a material merely because it has been purchased. Check the contract’s definition of earned work, stored material, title, risk of loss, off-site storage, and required backup. If the project does not allow the material to be billed yet, placing it on G703 can create a reconciliation problem even when the invoice is real.

Keep the schedule-of-values line, quantity, amount, supporting document, and current status aligned. The tool can calculate the number, but it cannot decide whether the project’s reviewer accepts the evidence.

Retainage release is not automatically a 50% milestone

Some contracts provide for a reduction or partial release as the work approaches substantial completion; others hold the stated percentage until final completion, acceptance, closeout, or another defined event. A 50% completion threshold is not a universal rule. Use the milestone written in the contract, approved amendment, or applicable law.

Substantial completion and final completion are also different concepts. Substantial completion may allow the owner to use the work while punch-list or closeout items remain. Final completion generally involves satisfying the remaining contract requirements. The project may use a certificate, punch list, final inspection, lien or payment waivers, warranties, as-builts, operations documents, testing, or other closeout evidence.

When requesting release, identify the trigger, approval, remaining work, amount held, disputed amount, and documents submitted. If a good-faith dispute exists, follow the contract’s notice and payment process rather than assuming the full balance is immediately due.

Public-contract rules are not private-contract defaults

Public construction contracts can have special retainage, progress-payment, prompt-payment, notice, and release rules. For example, the Federal Acquisition Regulation addresses retainage in government construction contracts and states that the amount and decision depend on the contract and contracting officer’s assessment. That federal framework does not automatically govern a private commercial subcontract or a state or municipal project.

State laws can also differ by project type, public or private status, contract amount, payment tier, and notice or waiver requirements. A state table copied into a general calculator can be outdated or wrong for the project in front of you. Use the applicable statute, contract, agency instructions, and qualified legal or payment professional when the question is legal rather than arithmetic.

The safe workflow is to label the rate, trigger, due date, and release condition as contract inputs, then attach the source or approval that supports each one.

Common reconciliation failures

Payment applications are often returned because the summary and continuation sheet do not agree, previous payments are duplicated, change orders are pending rather than approved, retainage is applied inconsistently, stored material lacks backup, or the percent complete is not supported by field progress.

Build a small reconciliation before submitting. Compare the current G703 line totals with the prior certificate, verify approved changes, calculate completed and stored to date, recalculate retainage, check the current payment request, and confirm that the G702 summary carries the same numbers. Keep rounding consistent and document adjustments instead of hiding them in an unexplained line.

Separate an arithmetic correction from a contract dispute. The calculator can show that two values do not reconcile; it cannot decide which party’s interpretation of the contract is correct.

• Match project name, application number, period, and line identifiers.
• Reconcile current and prior work to the approved schedule of values.
• Separate executed changes from proposed or pending changes.
• Verify stored-material eligibility and backup.
• Apply the contract’s retainage rule consistently by category.
• Record approved release events and remaining closeout conditions.
• Keep disputed amounts and notices visible rather than netting them silently.

Use the AIA pay-application workstation

The AIA pay-application workstation lets you enter the contract sum, approved changes, schedule-of-values lines, current and previous work, stored material, and retainage treatment. It calculates the relationships and helps identify missing or inconsistent values before the package goes to the reviewer.

The workstation does not determine the legally correct retainage rate, certify payment, approve stored material, release funds, interpret the contract, or replace the licensed AIA documents and required signatures. Save the permalink with the application period and use the project’s actual contract instructions as the authority.