By Eric Travers, Esq., Kegler Brown Hill + Ritter
As a construction attorney with over two decades of experience working closely with subcontractors and the American Subcontractors Association (ASA), I can confidently say that retainage has been, and remains, a significant and ongoing challenge for subcontractors nationwide.
The concept of retainage originated in the 1840s. Its purpose was straightforward: to hold back a percentage of each progress payment (typically around 5-10%) to give owners and general contractors leverage, to correct defects before final completion, and ensure that their subs were/are incentivized to complete necessary punch-list work.
For subs, though, retainage creates serious cash flow problems. In practice, it forces subs to finance the project. Bills must be paid on a tight schedule: labor costs accrue weekly or biweekly, while charges for materials and equipment used by subs are billed immediately upon purchase or rental. Yet while subs generally have to make their own payments quickly, they often find themselves waiting for the Project to reach “substantial completion” and the owner or general contractor to release funds for work that was completed correctly and paid for by the sub months to years earlier.
This delay can strain liquidity, especially for firms operating on narrow margins, where retainage may be equal to or less than the margin. Thus, aggressive retainage and delayed release of retainage can compel subs to draw on personal savings or take on loans to cover payroll, contributing to a cycle of financial distress. Despite performing over 75% of the hands-on work on typical projects, subcontractors frequently receive their final payments last. This disparity can breed disputes and, ultimately, mechanics’ liens filed for survival rather than spite.
Legislative Developments
While state legislatures have taken action to address these issues, the effectiveness varies. Laws primarily focus on public works projects.
Ohio’s retainage laws are a good example of this. The law applies only to public works, so private projects are essentially a matter of private contract and the parties’ contractual leverage.
Public Owners in Ohio have, prior to September 30, 2025, been limited to 8% retainage withheld for the first half of completion, dropping to zero thereafter (if progress is satisfactory).
By law, House Bill 96, passed on September 30, 2025, reduced this to a maximum of 4% for labor on the entire project, throughout the life of the Project, with retainage mandated to be paid within 30 days of substantial completion of the Project.
But for private work, the landscape remains murky with minimal regulation. The closest statutory hammer available to subs on private work is Ohio’s Prompt Payment Act, which requires general contractors to release payments within 10 days of receipt, applying an annual interest rate of 18% on delayed payments, accompanied by potential recovery of attorney’s fees. But the Prompt Pay Act is riddled with loopholes that minimize its effectiveness.
Other states have enacted their own variations of retainage and Prompt Pay Act regulations, but each comes with its own set of challenges.
Navigating the Landscape
Understanding local laws is crucial, but these regulations are not foolproof. As noted above, many are only applicable to public projects, and subcontractors often face pay-if-paid clauses that jeopardize their legal protections.
Because of the relative lack of bargaining power most subs have, it’s essential to view retainage as a predictable obstacle rather than an insurmountable barrier. A proactive approach involves pushing for lower or no retainage when you can and working with general contractors who are aligned on that and will advocate for it with the owners. Where you have to accept retainage (which will be reality on many jobs), well managed subs should seek to manage the risks and ensure smoother cash flow with meticulous documentation and strategic nudges.
Six Practical Tips for Subcontractors to Manage Retainage
Based on years of reviewing subcontractor contracts and advising on retainage-related challenges, here are six practical tips tailored for subs negotiating from a position of limited leverage.
Tip 1: Pre-Bid, Master Your State’s Playbook
Integrate a construction attorney into your process early on and utilize ASA’s 50-state manual or free online resources to familiarize yourself with retainage caps, timelines, and penalty provisions. If you detect terms in a subcontract exceeding local statutes, gently inquire about alignment: “Since this is a public project, I think this needs to be tweaked to align with Rev. Code § 153.12. What do you think?”
State statutes can also provide “ammo” for suggested modifications of retainage on private jobs: if 4% on labor is considered good enough to protect the state on state jobs, that fact should carry some weight in your up-front negotiations, particularly if you can get the prime Contractor’s ear and Owner’s buy-in.
ASA’s 50-state manual is frequently updated to stay on top of changes to each state’s law. As a bonus, the contributing attorneys for the states are prominently listed, giving you a potential ally to get on your side early in the negotiations if you don’t already have a good construction attorney in your corner.
Tip 2: Peek at the Prime Contract Early and Often
Seek insights into the prime contract’s retainage clauses.
If the Subcontract flows the prime down (and it will), you are entitled to see the Prime Contract. If retainage is blurred or obscured, ask about it outright. And make it a practice to ask the prime contractor to confirm in the Subcontract that it will not withhold more retainage from you than the owner withholds from it.
This approach can reveal if the general contractor is seeking to use retainage to increase your exposure while minimizing direct confrontation.
Tip 3: Log Milestones Like Your Next Meal Ticket
Document your work with timestamped photos, field reports, and joint sign-offs where possible. This can provide proof of “substantial completion” as defined by state law, laying groundwork for partial retainage releases.
If you are an early finishing trade, strongly consider seeking release based on your substantial completion instead of Project Substantial Completion. It’s fair to ask for, and if the answer is no, make sure you have worked a cost into your bid to put a price tag on having to wait for an extended period for your retainage.
Tip 4: Incorporate Retainage into Your Bids
Don’t forget about retainage when bidding. Consider integrating a buffer (5-10% or whatever you feel you can justify) to account for anticipated cash flow disruptions. By planning for retainage from the start both here and in the schedule of values, you’ll be better positioned to avoid panic during payment delays.
The obvious difficulty is walking the line between a competitive bid and pricing yourself out of work. Still, doing things like the above, and making your bid contingent on an agreeable retainage release clause, mutually agreeable contract terms, or other language that gives you a hook for the conversation can provide valuable leverage to secure reasonable concessions on this point without unduly compromising the competitiveness of your price.
Tip 5: Leverage Interest as Your Silent Enforcer
Most states, including Ohio, automatically apply penalties on overdue retainage. Ohio’s is 18% per year, to be exact. Don’t leave money on the table; track your upstream payments through public notices or gentle inquiries.
When you become eligible for a retainage release, promptly send a clear written notice referencing the contract terms and deadlines, and attach relevant milestone documentation. Many general contractors are averse to statutory interest accruing on late payments. They may be more willing to pay, particularly when it is clear that the Owner has released the retainage.
If you see those overdue amounts and aren’t satisfied with the response you’ve received, invoice for the accrued interest yourself.
That’ll get their attention.
Tip 6: Align with Trusted Allies for Bulk Insight
Engage with the ASA or your local chapters for invaluable resources like webinars, templates, negotiating tips and insights on developing areas of the law in your state. Many members are willing to share their retainage experiences, giving you free education to navigate this landscape more effectively. If you know what owners or general contractors are known for fair terms and timely releases, you can prioritize bids with them and cultivate relationships built on trust and mutual benefit. Networking can help turn isolation into a strategic advantage.
Retainage isn’t going away anytime soon as it’s too closely tied to perceived risk allocation in construction contracts.
And while laws provide some protection on some projects, your habits are what elevate you above the fray. With leverage often in short supply, your best bet is thorough preparation and unwavering persistence. The subs who excel are those who document diligently, forecast thoughtfully, and maintain professional nudges throughout the process.
When disputes inevitably arise, that’s the moment to call your legal counsel and enforce the strong foundation you’ve built. As regulations continue to evolve (a number of states, not just Ohio, have enacted substantive changes in the past 3-4 years to retainage statutes) being prepared and staying informed will serve you well.
Your cash flow deserves it, and so do you.
About the author:
Eric Travers, Esq., is a seasoned construction attorney at Kegler Brow n Hill + Ritter, bringing extensive experience in guiding contractors through complex legal challenges, including payment disputes, contract negotiations, and change order issues. Eric’s practical, results-driven approach makes him a trusted advocate for construction businesses seeking to negotiate contracts and change orders, and fairly and efficiently navigate the intricacies of project disputes with his client’s best interests in mind. Eric is also a recognized national speaker and author on construction law topics and has advocated for industry interests before the U.S. Supreme Court.
Eric can be contacted at (614) 462-5473 or etravers@keglerbrown.com.
