Retainage

Retainage, also called retention or a holdback, is a share of each progress payment that is kept back until a construction project is finished. It gives the payer leverage to make sure the work is completed properly and that everyone down the line gets paid.

Retainage shows up at several levels. A project owner holds it from the general contractor. The general contractor holds it from subcontractors. And a construction lender often holds back part of each construction draw under its loan agreement. The OCC (Office of the Comptroller of the Currency), which supervises national banks in the US, notes that under a progress payment plan, banks commonly hold back 10 to 20 percent of each payment to cover overruns or unpaid bills.

The math is simple: retainage held = approved draw × retainage rate. Here is an example with round, hypothetical numbers. An approved draw of $200,000 at 10 percent retainage funds $180,000 and holds $20,000. After five similar draws, $100,000 is held. Some contracts lower the rate once the job is half done, and most release the balance at substantial or final completion.

Why it matters for lenders

Retainage is a cushion. If a contractor walks off the job or a subcontractor files a lien, the held money can pay to finish the work or settle the claim. Releasing it too early removes that cushion when the project is most exposed.

The rules vary by state, so lenders shouldn't assume one standard. In the US, some states cap retainage or set deadlines for releasing it, and the rules can differ for public and private projects. For example, for most private contracts signed on or after January 1, 2026, California caps retainage at 5 percent, with some exceptions. A lender's own holdback is set by its loan agreement, but it has to work alongside the owner's contracts and the law where the project sits. Lenders should confirm local rules with counsel.

How it works in practice

A loan administrator funds monthly draws on a 40-unit apartment project. With each draw, she records the retainage held by budget line and by contractor. At substantial completion, the borrower asks for a partial release. She confirms the inspector's completion report, collects lien waivers and checks title before releasing part of the balance. At final completion, she requires final waivers from every trade, the final inspection, and a certificate of occupancy before releasing the rest.

In a side spreadsheet, retainage totals drift from the loan balance. That turns the final draw on a construction loan into the slowest and riskiest one.