Understanding Retainage Bonds

Retainage, also known as retention, is a common practice in the construction industry where project owners withhold a portion of contract payments throughout the duration of a project. Typically, the retained amount is 5 to 10 percent of each payment. These funds are not returned to the contractor until the project is completed to the owner’s satisfaction. Retainage serves as an incentive for contractors to finish the work diligently and acts as a safeguard against any issues that may arise after project completion.

What is a Retainage Bond?

An alternative to retainage is a retainage bond, also referred to as a release of retainage bond. Contractors who prefer not to have a portion of their payments withheld can obtain this bond. The retainage bond functions similarly to retainage by guaranteeing that the work meets the required standards. Instead of waiting for the retained funds to be released—which can be a lengthy process, especially for subcontractors—the contractor can secure a bond. This allows them to receive full payment upfront, enabling them to pay subcontractors promptly and maintain a steadier cash flow.

Benefits of Retainage Bonds

Retainage bonds offer several advantages:

  • Immediate Full Payment: Contractors receive full payment without waiting for retainage release.
  • Timely Subcontractor Payments: Contractors can pay their subcontractors more promptly.
  • Steadier Cash Flow: With full payment in hand, contractors can maintain a more stable financial status.
  • Owner’s Financial Protection: The bond provides the same level of financial security and confidence to the project owner as traditional retainage.

Retainage bonds provide a practical solution for contractors looking to improve their cash flow and for project owners seeking assurance that the work will be completed to the desired standards.

How do I get a Surety Bond?

Surety bonds are issued by Merchants Bonding Company (Mutual) through insurance agents. Contact your local insurance agent or use our Find an Agent tool. They will guide you through the process, informing you of what documents and information are needed by the surety (Merchants Bonding Company (Mutual)) to underwrite your bond.

What is a Surety Bond?

A surety bond is a three-party agreement that ensures the fulfillment of a commitment or contract. For instance, the surety (Merchants Bonding Company (Mutual)) may provide a surety bond to a construction company (the principal) which is required by the state (the obligee), ensuring the construction company will perform the duties as outlined in the contract. In bonding the construction company, Merchants assumes the risk should the company default or not fulfill their contract. A surety bond is different from traditional insurance in that the principal is obligated to pay back the surety company on any claims paid out.

All information provided is subject to change.