What is the impact of retainage on a contractor's cash flow during construction?

• A. Increases cash flow
• B. Reduces cash flow
• C. Has no effect
• D. Doubles cash flow

Answer: (B)

Retainage reduces cash flow. Retainage is a holdback by the project owner: part of each progress payment is withheld until certain milestones are met or the project is completed. Even though you’ve completed work and billed for it, you don’t receive the full amount right away. For example, if you bill for $100,000 and the retainage is 10%, you only get $90,000 in cash at that time while $10,000 is kept back. That withheld portion isn’t available to cover everyday operating costs like wages, materials, and subcontractors, which tightens the contractor’s near-term cash flow. The withheld funds are usually released later, after milestones or at project close, but during construction they suppress the cash actually flowing in.