What is retainage in construction lending?

How retainage works.

On a pay application, each budget line shows the work completed, any materials stored and the amount retained. The AIA's G702 and G703 forms, common on commercial and larger residential jobs, carry retainage in its own column so it can vary by line, as the G703 instructions describe. The owner pays the balance and keeps the retained amount until the contract's completion conditions are met.

Why it exists.

Retainage gives the owner, and through the owner the lender, leverage to get the punch list finished and to make sure subcontractors and suppliers are paid before the last dollars go out. Unpaid subcontractors can file mechanics' liens against the property, so the final release is usually tied to final lien waivers.

What usually comes before release.

Typical conditions, set by the contract and the loan agreement:

• substantial or final completion, documented by a final inspection;
• a certificate of occupancy, where the jurisdiction issues one;
• final lien waivers from the general contractor and the major subcontractors and suppliers;
• the punch list closed or priced.

The FDIC's construction and land development examination procedures ask whether lenders obtain lien waivers as work is completed and confirm a certificate of occupancy before the final disbursement.

Why it matters for lenders.

Retainage is the part of the budget that pays for finishing. Releasing it early removes the incentive to finish; releasing it without final lien waivers can leave the property exposed to liens. Retainage rules vary by state, so confirm the requirements for each project with counsel.

How RAZE handles it.

In RAZE, interim draws and the final inspection run in the same workflow, and the final report arrives in the same standardized format as every prior draw, with percent complete by line and photos linked to the lines they support. The lender sees what is finished before releasing the last draw. See draw inspection vs. final inspection. RAZE does not release funds; the lender decides.