Introduction
In the construction industry, getting paid on time is already a challenge, but there’s another hurdle contractors often face: retention money. Retention money is a portion of your payment that’s withheld by the client until the project is completed, or even beyond that, to ensure the work meets the agreed-upon standards.
Typically, retention money ranges from 5% to 10% of the contract value, and while it’s designed to protect clients, it often creates cash flow headaches for contractors. After all, you’ve got bills to pay, materials to buy, and payroll to cover—so having a chunk of your earnings held back can strain your finances.
At BidM8, we understand the unique challenges retention money creates for builders and contractors, and we’re here to help you navigate it. In this blog, we’ll break down what retention money is, why it exists, how it impacts contractors, and how to manage it effectively.
What Is Retention Money?
Retention money is a financial safeguard used in construction contracts. It’s essentially a percentage of the payment owed to a contractor that’s withheld by the client until the project is completed to their satisfaction.
Retention money ensures the client has leverage in case:
- The work is left unfinished.
- The work doesn’t meet quality standards or specifications.
- Repairs or fixes are required during the defects liability period (usually 6-12 months after project completion).
Retention is typically outlined in the contract terms and is held until:
- Practical Completion: When the project is substantially complete and usable. At this stage, half of the retention money may be released.
- Final Completion: After the defects liability period, when all issues have been resolved, and the remaining retention is released.
Why Does Retention Money Exist?
Retention money exists to protect clients from potential risks associated with construction projects, such as:
- Ensuring Completion
Clients want assurance that contractors won’t abandon the project halfway through. Retention money gives them leverage to ensure you stay committed to finishing the job. - Guaranteeing Quality
Retention provides a financial incentive for contractors to deliver high-quality work and address any issues that arise during the defects liability period. - Covering Costs of Repairs
If the contractor fails to fix defects or complete the project, the client can use the retention money to pay another contractor to finish the work.
While retention money offers peace of mind for clients, it often creates financial strain for contractors—especially small and medium-sized businesses that depend on steady cash flow to stay operational.
How Retention Money Impacts Contractors
For contractors, retention money is essentially delayed income, and that can lead to a range of challenges, including:
1. Cash Flow Issues
Retention money can tie up a significant portion of your earnings for months—or even years. This can make it difficult to:
- Pay suppliers and subcontractors.
- Purchase materials for new projects.
- Cover payroll or operational expenses.
2. Strained Relationships with Subcontractors
If you’re withholding retention money from subcontractors while waiting on your own payment, it can create tension and disrupt workflows.
3. Limited Growth Opportunities
When retention money is locked up, it can restrict your ability to bid on or take on new projects, stunting your business growth.
4. Financial Risk
Delayed retention payments—whether due to disputes, defects, or client delays—can lead to financial instability for contractors relying on those funds.
Financing Options to Manage Retention Money Gaps
While retention money is a necessary part of construction contracts, it doesn’t have to derail your cash flow. Here are some financing solutions to help you bridge the gap:
1. Retention Release Financing
Retention release financing allows you to access the value of your withheld retention money before it’s released by the client. A financing company will advance you a percentage of the retention amount, providing you with immediate cash to cover your expenses.
How It Works:
- The financing company evaluates your contract and retention terms.
- They advance you a portion of the retention amount (e.g., 80%).
- Once the client releases the retention money, you repay the financing company (plus fees).
Benefits:
- Improves cash flow by unlocking funds tied up in retention.
- Allows you to cover expenses and take on new projects without delays.
2. Invoice Factoring
If retention money is causing cash flow challenges, factoring other unpaid invoices can provide the liquidity you need. By selling your invoices to a factoring company, you get immediate access to cash without waiting for client payments.
3. Lines of Credit
A business line of credit provides flexible funding that you can draw from as needed to cover cash flow gaps caused by retention money.
4. Short-Term Loans
For contractors facing short-term cash flow challenges, a working capital loan can provide the funds needed to manage expenses until retention money is released.
At BidM8, we specialize in helping contractors find the right financing solutions to navigate retention money challenges and keep their businesses running smoothly.
Tips for Negotiating Retention Terms in Contracts
While retention money is standard in construction contracts, you can negotiate terms to minimize its impact on your cash flow. Here’s how:
1. Request Lower Retention Percentages
Instead of accepting the default 10%, negotiate for a lower retention percentage, such as 5%. This reduces the amount of money withheld and eases your cash flow burden.
2. Propose Milestone Releases
Negotiate for retention money to be released in stages as you complete key project milestones. For example:
- 25% of retention released after 50% of the project is completed.
- Another 25% released at practical completion.
- The remaining 50% released after the defects liability period.
3. Shorten the Defects Liability Period
Instead of agreeing to a 12-month defects liability period, negotiate for a shorter period, such as 6 months, to accelerate the release of retention money.
4. Add Clear Terms for Retention Release
Ensure your contract specifies clear timelines for the release of retention money. For example, include a clause that requires the client to release funds within 7-14 days of project completion.
5. Build Retention Into Your Pricing
Factor retention money into your bid or pricing to account for the delay in receiving full payment.
6. Work with BidM8
At BidM8, we can help you navigate contract negotiations and connect you with financing options that minimize the impact of retention money on your business.
Why Choose BidM8 to Help Manage Retention Challenges?
At BidM8, we understand that cash flow is the lifeblood of your construction business. Here’s how we can help:
- Tailored Financing Solutions: Whether you need retention release financing, invoice factoring, or a line of credit, we’ll connect you with the right options to keep your business running smoothly.
- Expert Guidance: Our team has extensive experience in construction and understands the challenges of retention money. We’ll help you navigate contracts and financing with confidence.
- Trusted Partners: We work with reputable lenders and financing companies to ensure you get fair terms and reliable service.
Conclusion
Retention money is a common practice in construction contracts, but it doesn’t have to derail your cash flow or disrupt your business. By understanding how retention works, negotiating better terms, and leveraging smart financing solutions, you can overcome the challenges it creates and keep your projects moving forward.
At BidM8, we’re here to help contractors like you manage retention money and maintain steady cash flow. Whether you need advice on contract terms or access to financing, we’ve got you covered.
Need help managing retention money? Contact us today at Click Here or fill out our Financial Services Survey to explore your options.
Don’t let retention money hold your business back—let BidM8 help you unlock your cash flow and grow with confidence.