Construction Progress Payments and Need for Holdbacks/Retainage

5 Replies

I am about to enter a construction contract that should take about 4-6 weeks. For the sake of argument, let’s say the contract is for $100,000. The contractor’s proposed contract plans for four progress payments...on 25% completion, 50%, 75% and 100% completion. However, it does not provide for any holdbacks/retainage from each payment.

I have heard construction lenders will hold back from each draw.

Even though I am paying in cash, should I not require some sort of holdback (5%?) from each draw to protect myself from incomplete work and unpaid subcontractors/suppliers? And how long should I hold it for?

Ooorrrr... How about you specify what 25%, 50%, 75%, and 100% completion means and then you don't have to worry about whether or not the work has been completed?

Lol. How would WE protect ourself from you not paying us?

For banks/lenders, they are easy to squeeze money, it’s not their money, they have no reason to hold it, plus they are more professional to deal with because they know the industry more or at least they know whay the industry standards are. It’s easy to small claim them, and they don’t want the publicity/hassle.

Dealing with investors is a different story, it’s their money they are holding, once it’s in the pocket, nobody likes to let them go. It’s not for everybody, but there are as many shady investors as shady contractors. Quarter pays are tricky.

@David S.

Think of your contractor as your partner. If you were in a partnership in a business, would you not spell every detail out of how the business (you and your partner) operate the business?

Why should that be any different for your contractor? If you want to pay in increments that's fine. Provide the training for doing so. But make sure that your contractor is meeting your expectations. If they are, make sure they are whole at the end of the day so it's a win win for everyone.

I constantly read on BP about how terrible contractors are but you do have to realize that there are also a lot of investors that are not easy to deal with. Personally I think the reason is people have expectations in their mind and don't adequately explain them to their GC's. Nor do they put it on paper in detail.

I guarantee that if you don't consistently try to beat your contractor down on price and develop a relationship with them, then things will work out. Don't get me wrong, I think it's great to be cautious with your contractors but make sure you are taking care of them as well.

I am in both sides of this equation so I do have a good understanding of where both parties are coming from. You need a contractor as much as they need you.

I recommend paying contractors in increments (whatever makes sense to both parties). I don't recommend deposits upfront. I do feel that if you have a strong contractor, they should not need a deposit upfront. Just remember if it is a big project with large upfront costs, this could change the incremental pay schedule to be earlier on the first draw. Again, keep everyone happy on the "partnership".

Hope this helps.

Originally posted by @David S. :

I am about to enter a construction contract that should take about 4-6 weeks. For the sake of argument, let’s say the contract is for $100,000. The contractor’s proposed contract plans for four progress payments...on 25% completion, 50%, 75% and 100% completion. However, it does not provide for any holdbacks/retainage from each payment.

I have heard construction lenders will hold back from each draw.

Even though I am paying in cash, should I not require some sort of holdback (5%?) from each draw to protect myself from incomplete work and unpaid subcontractors/suppliers? And how long should I hold it for?

David, I'm a Subcontractor. When I work with General Contractors and Private Investors this how it's handled.

With a General Contractor, they hold 10% each progress payment they make. I then have to provide a release showing the amount I was paid each time. I get the retainer at the end once the punch list is completed.

With Private Investors, I submit my invoice for full amount and 20-day prelim. If they don't pay, I will lien the property. When they pay, I send a release showing I was paid.

It will depend on the agreement that you draft up with your contractor. If you go to the CSLB you will see the different kind of releases.

Hopefully this information helps..

@Aaron C. Review your 20-day prelim. If the investor is not a GC, it will be too late for your lien to take effect, even if you have a C license (common known as subcontractor in CA), if your contract is with the investor/owner, you will be prime contractor, and the 20-day will not hold up.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here