| Detail | Explanation |
|---|---|
| Set by | The construction contract, within limits set by state law and public contract rules |
| Held from | Each progress payment to the general contractor, and often to subcontractors |
| Released | At substantial or final completion, with lien waivers and closeout documents |
| Lender view | Protection against incomplete work and a funding obligation at the end |
| Related document | AIA-style pay application showing retainage to date |
How does retainage work on a construction loan?
Each month the general contractor submits a pay application showing work completed to date. The owner pays the earned amount less retainage, and the lender funds its share of that net figure through the construction draw. The retained dollars stay in the budget as a cost that has been earned but not yet paid.
Retainage rates and release rules are not uniform. Many states cap retainage or require its release within a set time on private or public projects, and the limits differ by state and by project type. The contract governs within those limits, so confirm the rule in the state where the property sits before assuming a rate or release schedule.
Some contracts reduce the rate after the project reaches a midpoint, or release retainage by trade as subcontractors finish. Lenders read those clauses because a reduction releases cash earlier and leaves less holdback if the job goes wrong late.
Worked example: a draw with retainage held back
In this hypothetical example, the construction contract is $8,000,000 with a 10% retainage rate written into the contract. The rate here is illustrative and is not a statement of any state's limit. Through the prior draw, $3,000,000 of work was complete. This month the contractor bills $1,000,000 of new work.
| Line | Amount |
|---|---|
| Work completed to date | $4,000,000 |
| Retainage held to date at 10% | $400,000 |
| Earned less retainage | $3,600,000 |
| Paid on prior draws | $2,700,000 |
| Current payment due | $900,000 |
| Contract balance to finish, including retainage | $4,400,000 |
Why lenders care about retainage
- It is part of the cost to complete. The lender's balance-to-finish test includes unpaid retainage, so the loan plus remaining equity has to cover it
- It keeps the contractor invested in finishing. A contractor that has been paid in full has less reason to return for punch-list work
- Early release reduces protection. A request to release retainage before completion usually needs lender approval
- Subcontractor retainage affects lien risk. Lenders want lien waivers that match what was actually paid at each tier
- The inspector's report and the pay application should agree on percent complete before any retainage is released
How retainage is released at the end
Release usually follows substantial completion, a punch list, the architect's certification, final lien waivers from the contractor and major subcontractors, and a title update with no new mechanics' liens. The lender may also require a certificate of occupancy and as-built documents before it funds the final retainage draw.
Timing matters for the exit. If retainage is still outstanding when the takeout loan closes, the permanent lender will want the lien exposure resolved or reserved. Build the closeout sequence into the schedule so the refinance is not waiting on paperwork.
Our guide to construction underwriting explains how retainage fits with draw controls and completion tests. For a project that needs construction financing, submit the deal with the contract and budget attached.
Common questions
What is a normal retainage percentage in construction?
It depends on the contract and on state law, which varies. Many states cap retainage or set release deadlines, and public projects often have their own rules. Check the statute in the project's state and the contract before budgeting.
Does the construction lender hold the retainage?
Usually the retained amount simply stays unfunded in the loan budget until release. The lender does not advance it to the borrower, so it remains available as part of the cost to complete.
Is retainage included in the construction budget?
Yes. Retainage is part of the contract price, so it sits inside hard costs. It is paid later, so the draw schedule shows it as earned but unpaid until release.
When is retainage released?
Typically after substantial or final completion, once the punch list is done and the contractor delivers lien waivers and closeout documents. The contract and state law set the deadline, and the lender usually has to approve the release draw.
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