Holdback (or retainage) is a standard practice on construction projects where the lender or owner withholds a portion of each draw payment until final completion and inspection. On residential projects, the typical holdback is 10 percent of each draw, though rates vary by lender and contract terms. The idea is to create a financial incentive for the contractor to complete all work and correct any defects before the final payment is released.
Holdback is released in stages: some lenders release half the holdback at substantial completion (when the home is weathertight and substantially functional) and the other half after final inspection and a specified number of days with no new defects (typically 30 to 60 days). Others hold the full amount until Certificate of Occupancy and all lien waivers are in place. For a project with a total contract price of 500k, a 10 percent holdback means 50k is withheld over the course of the draws, which can strain the contractor’s cash flow if not carefully managed. Understanding holdback terms upfront and factoring them into project cash flow is critical for both builders and contractors.