Retainage calculator

Retainage is a percentage of each progress payment withheld by the lender until the project is substantially complete. It is a security deposit held in trust, protecting the lender against incomplete work, liens, and cost overruns. On a $430,250 contract at 10% retainage, $43,025 is held across all draws and released only at final. Understanding retainage is critical because it represents real cash the builder has earned but not received.

The formula

Retainage is a simple percentage of the gross draw amount. It compounds across draws: retainage is held on each draw and accumulates until release.

Retainage per Draw = Gross Draw Amount × Retainage Rate % Cumulative Retainage = Sum of Retainage from All Draws Net Draw = Gross Draw − Retainage This Draw Cash to Builder = Prior Draws (net) + Current Draw (net)

For example, on a $77,445 draw at 10% retainage, the builder gets $69,700 and the lender holds $7,745. On the next $77,445 draw, another $7,745 is held, for a cumulative retainage of $15,490. The builder sees neither amount until the project is complete.

Worked example: 926 Stratford with tiered retainage

Contract value: $430,250. Some lenders use tiered retainage: 10% until 50% complete, then 5% thereafter. Here is the running balance through 7 draws:

The builder has earned $430,250 by the end of draw 7 but has received only $398,410. The remaining $31,840 in retainage is released after substantial completion, punch list walk, lien waivers, and certificate of occupancy. The total cash to builder over the project life is $430,250, but the timing is compressed: 93% is received during construction, 7% at the very end.

Inputs and what they mean

Retainage rate

Standard residential is 10% flat across all draws. Some jurisdictions allow tiered retainage: 10% until 50% complete, then 5%. Commercial projects often use 10% until substantial completion, then full release. A few states (Florida, Colorado) cap residential retainage at 5%. Check your contract and local law before assuming 10%.

Percentage complete by draw

The percentage of total contract value earned through the current draw. On 926 Stratford, draw 1 (foundation) is 12% of work. Draw 3 (dry-in) brings the project to 48% complete (12% + 18% + 18%). At draw 4 (60% complete), some lenders flip the retainage rate from 10% to 5%. Verify the tiering in your loan commitment.

Gross draw amount

The total contract value multiplied by the phase weight percentage. On a $430,250 contract, an 18% phase (framing) is $430,250 × 0.18 = $77,445 gross. Retainage is calculated on this gross amount, not on the net.

Cumulative retainage

The sum of all retainage held from all prior draws plus the current draw. This is the total cash held by the lender at any point in time. It grows with each draw and remains flat once the project is complete (no new draws), pending release at final. On 926 Stratford, cumulative retainage peaks at $31,840 at the end of draw 7.

Tax and trust-fund implications

Retainage as trust account funds

In many states (New York Lien Law section 71, Colorado section 38-22-127, California Labor Code section 1300), retainage must be held in a separate trust account by the lender or contractor, not commingled with the lender’s operating funds. The purpose is to protect downstream subcontractors and materialmen if the builder goes insolvent mid-project. The lender’s attorney can instruct the lender to hold retainage in trust; builders should ask for confirmation.

Tax treatment of retainage

From a tax perspective, retainage held by the lender is still recognized as contractor income in the year earned (cash or accrual basis). The builder cannot defer income tax by deferring receipt of retainage. Consult your CPA, but expect to owe tax on the full contract value in the year the work is completed, not when the cash arrives.

Subcontractor retainage pass-through

Builders sometimes hold retainage from subcontractors at the same rate the lender holds from them (a 10% pass-through). This is common and legal in most states, but some jurisdictions restrict it. California Mechanics’ Lien Law section 3813 limits retainage pass-through on residential projects. Massachusetts General Laws chapter 149, section 29L caps retainage at 5% on residential. Always check state law before imposing retainage on subs.

Retainage release conditions

Substantial completion

The lender and owner agree the project is substantially complete when it can be occupied and used for its intended purpose, even if minor punch items remain. This usually happens when the certificate of occupancy is issued, not when the final nail is driven. Retainage typically starts releasing at this point, though some lenders hold until all punch work is finished.

Lien waivers

Before releasing retainage, the lender requires unconditional lien waivers from every vendor and sub billed against the project. A waiver is a one-page signature confirming the vendor has been paid in full and releases the right to place a lien on the property. Lenders usually require all prior-period waivers before releasing funds for a new draw. This creates a chain: you cannot get paid for the current draw until you have produced waivers from the prior draw.

Certificate of occupancy

Most lenders require a copy of the CO before releasing retainage. Some release a portion of retainage at substantial completion (CO issuance) and the remainder after final inspection and punch close-out. The CO is proof that the project is legally occupiable.

Punch list close-out

Minor incomplete items (paint touch-ups, caulk, hardware finish) are captured on a punch list at substantial completion. The final retainage release happens after the owner and lender inspector walk and confirm all punch items are complete. This typically takes 2 to 4 weeks post-CO.

Edge cases and gotchas

Retainage on change orders

A $50,000 change order approved mid-project is subject to the same retainage rate as the base contract. If the base is 10%, the change order is also 10%. The retainage on the change order is held and released under the same terms as the base. Do not assume change orders skip retainage; they do not.

Retainage does not reduce project cost

Retainage is a timing issue, not a discount. The builder must still account for the cash flow gap. On 926 Stratford at $31,840 retainage, the builder might need a credit line or working capital to bridge the gap between when retainage is earned and when it is released. Factor this into your project financing.

Tiered retainage and % complete disputes

If the contract specifies 10% until 50%, then 5%, the lender and builder must agree on the % complete at each draw. A builder claiming 52% complete (to trigger the 5% rate) might be challenged by the lender inspector claiming 48%. This dispute can delay a draw by weeks. Take detailed progress photos and keep the schedule of values updated to avoid ambiguity.

Early payoff and retainage acceleration

Some construction loans allow the borrower (builder) to buy out retainage early, paying interest to accelerate the release. This is rare on standard residential loans but more common on construction-to-permanent loans. Ask the lender if buyout is an option if you have a tight cash flow situation.

How BuilderGrid uses this calculator

BuilderGrid’s draw and retainage module calculates the cumulative retainage balance at each draw and shows the final release amount and conditions. When you enter the retainage rate and the tiering (if any), the system applies it consistently across all draws and flags any inconsistencies with the contract. It also tracks when retainage conditions (CO, waivers, punch list) are satisfied, so you can see exactly when the remaining cash is expected. This visibility helps with cash flow forecasting and late-stage project financing.