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Dec. 6, 2004: Study Says Retainage Increases Costs

December 6, 2004
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ALEXANDRIA, Va. - A study published by the Foundation of the American Subcontractors Association (FASA) concludes that the practice of retainage, widespread in the construction industry, "reduces competition and increases the cost of a project," inducing general contractors to increase contract prices by 2.2 percent, and inducing subcontractors to increase contract prices by 3.6 percent.

These effects of retainage are "in harmony with economic theory," noted Dennis Bausman, Ph.D., assistant professor in the Construction Science & Management Department at Clemson University, author of "Retainage Practice in the Construction Industry." The study also finds that retainage negatively impacts project relationships, and that there is support within the industry for changes to current retainage practice.

"The Foundation of ASA hopes that ‘Retainage Practice in the Construction Industry' will be a major contribution to the body of knowledge on retainage," said FASA President Richard Wanner, of Wanner Metal Worx Inc., Delaware, Ohio. "The study reveals the perceptions of retainage by different parties, and explores alternatives to retainage as it exists now. It dispels some of the myths about retainage, such as that retainage does not influence project relationships or that there is no substantial float time between the general contractor's receipt of subcontractor retainage and payment to the subcontractor."

"Retainage Practice in the Construction Industry" begins with a historical perspective on retainage, and then examines quantitative survey data that answer some of the questions about retainage. The survey collected responses from more than 1,000 owners (public and private), architects, construction managers, general contractors, and subcontractors nationwide.

The study finds areas of consensus and areas of wide disagreement about retainage among the different construction team members. For example, the study reports that:

1. The whole construction team could support reduction of retainage levels; line item release of retainage to early-finishing trades; escrow accounts for retained funds; and prompt payment of retained funds.

2. Construction owners and their agents believe that at-risk construction managers and builders are not less likely to pursue a project if funds are retained, while majorities of at-risk construction managers, general contractors, and subcontractors say they are less likely to pursue such projects.

3. Federal government construction owners - the group with the most experience in total elimination of retainage on projects - believe that elimination of retainage has a favorable impact on project relationships, while other owners - who almost never eliminate retainage - do not.

4. Construction owners and their agents strongly believe that retainage is paid in full on each project, but construction managers at-risk, general contractors, and subcontractors state that they do not always receive payment in full.

5. Owners, architects, and construction managers submit that retainage is paid promptly upon completion, whereas at-risk contractors and subcontractors claim it is not.

6. Construction owners and their agents believe that retainage abuse is not widespread, while all other parties, and especially subcontractors, believe that the economic leverage of retainage is used to favorably settle claims for changes or extra work.

7. Construction owners and their agents don't have a strong opinion about whether retainage is needed as an incentive for quality work.

8. While alternatives to current retainage practice are not in wide use, such alternatives might meet the main concern of construction owners who defend current retainage practice, which is proper completion of projects.

FASA commissioned "Retainage Practice in the Construction Industry" as the first study in its Contractors' Knowledge Quest research series. Future studies will examine reverse auctions, "additional insured" insurance requirements, and other topics. The retainage study is available online for $35 (nonmember price) or $25 (ASA member price) at FASA's Contractors' Knowledge Depot at www.contractorsknowledgenetwork.org.

Publication date: 12/06/2004

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