Whenever there is a construction project, there is a projected timeline for when the project is to be completed. Retainage in construction is a common practice that serves as an incentive for contractors and subcontractors to complete their work on time and adhere to project timelines. When there is a construction loan, the retainage percentage will be defined in the project contract and the construction loan forms. 
The retainage fee is collected from a percentage of each progress payment that is paid for work done. The retainage fee runs anywhere from 5% to 10% of the total approved funds. Once the full project is completed, the full retainage fee will be paid to the contractor. This is a great incentive for any contractor to get the project completed and done in a timely manner.
Contractors are usually reliable and stick to their word, but retainage is a good way to hold them accountable. It gives the owner peace of mind when it comes to getting the job done and getting it done in the decided timeframe. The retainage is basically holding back some of the money owed to the contractor so the contractor will stick to the plan if they know they will lose part of their profit.
The downside for contractors is a retainage can cause a cash flow problem. If a subcontractor needs to be paid, but the contractor is not paid in full, this can hinder the subcontractor from getting their fair cut. Retainage has been around for a long time and will not be going away anytime soon. This means it is wise for the lender, owner and contractor to understand the federal, state and local laws about retainage fees.
