Retainage Laws by State: How Much Can Be Held Back in 2026
What Retainage Is and Why the Percentage Matters
Retainage — also spelled retention — is the slice of every construction progress payment that the party above withholds and keeps until the work is complete. It exists to give the owner a pool of money to finish the job or cure defects if the contractor walks off or performs badly. But it is also the most distorted cash flow in construction, because it is withheld from the bottom of the payment chain upward and released from the top down. A supplier or second-tier subcontractor can finish its scope in month two of a twelve-month build and then wait the remaining ten months, plus the release period after final completion, to collect 5 or 10 percent of everything it earned. On a project where a subcontractor bills $1,000,000, a 10 percent retainage means $100,000 is held back; a 5 percent retainage means $50,000. Because construction net margins frequently run 3 to 6 percent, a 10 percent retained balance routinely exceeds the entire profit on the contract. That is why a reduction from 10 percent to 5 percent does not merely halve a withheld amount — it can be the difference between a contractor financing its full margin for a year and financing half of it.
Retainage Caps by State
The most common public-works ceiling in 2026 is 5 percent, used in states including California (Pub. Contract Code §7201), Washington (RCW 60.28.011), Oregon (ORS 279C.570), Colorado (C.R.S. §24-91-103), North Carolina (N.C.G.S. §143-134.1), Virginia, Maryland, Minnesota, New York, and Florida (Fla. Stat. §255.078). A second large cluster permits a higher rate early that must step down at the halfway milestone: Illinois (10% to 5% at 50%), Pennsylvania (10% to 5% at 50%), Georgia (O.C.G.A. §13-10-80, 10% to 5% at 50%), Missouri (RSMo §34.057), Arizona (A.R.S. §34-221), Connecticut (Conn. Gen. Stat. §49-41a, to 2.5%), Michigan and Indiana (10% with no further withholding after 50%), and Ohio (ORC §153.63, 8% stepping to 4%). New Jersey holds state public retainage among the lowest in the country at roughly 2 percent. Texas requires the owner to retain 10 percent of the contract value as a lien fund for claimants on private work under Prop. Code §53.101, with public-works retainage governed separately under Gov't Code §2252.032. Citations are research starting points; retainage provisions are amended frequently, so the controlling statute should be verified for each specific project type.
Five Retainage Regimes — How the States Group
Retainage law clusters into five recognizable regimes. First, the flat 5 percent cap: retainage may not exceed 5 percent of each progress payment for the life of the public job (California, Washington, Oregon, Colorado, North Carolina, Virginia, Maryland, Minnesota). Second, 10 percent with a 50 percent step-down: up to 10 percent early, then the rate drops to 5 percent or further withholding stops once the project is half complete and on schedule (Illinois, Pennsylvania, Georgia, Missouri, Arizona, Connecticut, Michigan, Indiana). Third, below 5 percent: a statutory public ceiling set below the national norm, as in New Jersey at roughly 2 percent. Fourth, private statutory caps: a percentage ceiling that applies to private projects, not just public works, as in Tennessee (5 percent on all projects) and Massachusetts (5 percent private). Fifth, no fixed percentage: public retainage set by agency contract within a reasonableness standard, as on federal FAR projects and several state agencies. The two largest regimes — the flat 5 percent cap and the 10-percent-with-step-down model — together cover most public construction in the United States.
The Private-Project Gap
The most consequential fault line in retainage law is the divide between public and private projects. Nearly every state regulates retainage on public works, but the majority impose no statutory percentage ceiling on private retainage at all, which leaves the limit to whatever the parties write into the contract. In practice the party with the most negotiating leverage — usually the owner or general contractor at the top of the chain — sets the number, and 10 percent is common on private work even in states that cap public retainage at 5 percent. A handful of states have closed the gap. Tennessee's T.C.A. §66-34-103 caps retainage at 5 percent on essentially all construction, public and private, and requires the withheld funds to be deposited in a separate interest-bearing escrow account, making it one of the most contractor-protective regimes in the country. Massachusetts caps retainage on most private commercial projects at 5 percent under G.L. c.149 §29F and imposes firm release deadlines. Several other states regulate private retainage indirectly through prompt-payment statutes that dictate how quickly retainage must be released once the work is accepted, even where they do not cap the percentage. The same 10 percent retainage clause can therefore be unenforceable in Tennessee and fully lawful in a by-contract state.
Who Earns the Interest — Escrow and Securities Rules
The percentage withheld is only half the retainage question; the other half is who earns on the money during the months or years it is held. Many public-works statutes require the awarding agency to deposit retainage in an interest-bearing account or invest it in securities, with the accrued interest paid to the contractor at final settlement rather than retained by the public body. Washington's public-works retained-percentage statute and Tennessee's escrow requirement are well-known examples. Several states allow the contractor to substitute a retainage bond or pledged securities for the cash held, which frees the working capital entirely while preserving the owner's security. On private projects without a governing statute, none of this applies — the contract controls, and most private contracts are silent on interest, so the withholding party holds the contractor's money interest-free for the duration of the job and the contractor finances its own retained margin at its own cost of capital. At a 2025-era cost of capital, financing a $100,000 retained balance for a year of hold runs the contractor several thousand dollars in pure carrying cost that never appears as a recognizable line item and is therefore chronically underpriced in bids.
Retainage and Lien Rights — The Deadline Trap
Retainage is the most exposed money on any construction project. It is, by design, the last money paid, which makes it the first money lost when a project runs into trouble, an owner runs out of funds, or a general contractor becomes insolvent. A perfected mechanics lien converts the unsecured retainage into a secured claim against the property itself. The trap is timing. In most states the deadline to record a mechanics lien runs from the claimant's last date of furnishing labor or materials, not from the date the retainage was contractually due to be released. A subcontractor who completes its scope early in a long project can watch the lien deadline expire while it is still waiting, in good faith, for a retainage check at final completion — leaving the retained balance, often the contractor's whole margin, unsecured. The defensive move is to treat the lien deadline as running on the full contract value, progress balance and retainage together, from first furnishing, and to track it on a per-project basis from day one. A timely lien, or on public work a timely bond claim, secures the retained balance before it is ever at risk, and a properly drafted lien waiver exchanged at each progress payment should carve out the unpaid retainage rather than inadvertently waive it.
What This Means for Contractors
First, price retainage as a financing cost, not a footnote. A 10 percent retained balance on a low-margin job can exceed the entire profit on the contract, and on a long project that money is financed for a year or more, usually interest-free to the contractor. Knowing the statutory ceiling for the project's state and type lets a contractor negotiate to the legal floor or build the carrying cost into the bid; on public work, insisting on the step-down at the 50 percent milestone recovers a large block of cash the contractor is legally entitled to but does not always receive automatically. Second, the protection a contractor has depends heavily on geography — in Tennessee and Massachusetts the private cap and escrow rules do real work, but in most states private retainage is whatever the contract says and the only hard backstop is the mechanics lien. Third, and most likely to cost real money, the lien deadline does not wait for the retainage. Tracking that deadline from first furnishing, on the full contract value, is the single discipline that keeps an early-finishing trade from forfeiting its security while it waits in good faith for a final payment. The Mechanics Lien Management State System calculates preliminary-notice, lien-filing, and enforcement deadlines for every active project across all 50 states.
Frequently Asked Questions
What is the maximum retainage that can be withheld on a construction project?
On public works, the most common statutory ceiling is 5 percent of each progress payment, and a large group of states permit 10 percent early in the job that must step down to 5 percent once the project reaches 50 percent completion. New Jersey holds state public retainage as low as 2 percent, while some agencies operate with no fixed percentage cap. On private projects most states impose no statutory ceiling at all, so the contract controls and 10 percent is common. The notable exceptions are Tennessee, which caps retainage at 5 percent on essentially all projects, and Massachusetts, which caps private retainage at 5 percent. Always verify the current cap for your project type and state.
Which states cap retainage on private construction projects?
Most states regulate retainage only on public works and leave private-project retainage entirely to the contract, so a private owner or general contractor can lawfully withhold 10 percent or more unless the subcontract says otherwise. Tennessee caps retainage at 5 percent on essentially all construction under T.C.A. §66-34-103 and requires interest-bearing escrow. Massachusetts caps retainage on most private commercial projects at 5 percent under G.L. c.149 §29F with statutory release deadlines. Several other states regulate private retainage indirectly through prompt-payment statutes that govern how quickly retainage must be released once the work is accepted, even where they do not cap the percentage.
What is a retainage step-down or reduction provision?
A step-down provision lowers the allowable retainage percentage once a project crosses a completion milestone, on the theory that the owner's security need shrinks as the risk of non-completion falls. The most common pattern allows 10 percent retainage through the first half of the job, then requires the rate to drop to 5 percent — or requires the owner to stop withholding entirely on subsequent payments — once the project reaches 50 percent completion and is on schedule. States including Illinois, Ohio, Pennsylvania, Georgia, Missouri, Arizona, and Connecticut use some form of 50-percent step-down, letting a contractor recover a large block of cash at mid-project rather than at final completion.
Does retainage have to be held in an interest-bearing escrow account?
It depends on the state and project type. Many states require public-works retainage to be deposited in an interest-bearing account or invested in securities, with the accrued interest paid to the contractor at final settlement. Washington's public-works retainage statute and Tennessee's escrow requirement are well-known examples. Some states let the contractor substitute securities or a retainage bond for the cash held, freeing the working capital while still protecting the owner. On private projects, an escrow or interest requirement generally exists only where a state has enacted a specific private-retainage statute; otherwise the contract governs whether interest accrues, and most private contracts are silent.
How does retainage affect mechanics lien rights and deadlines?
Retainage is the last money paid and therefore the first money lost when a project goes bad, yet the lien deadline that protects it does not wait for the retainage to come due. In most states the clock to record a mechanics lien runs from the claimant's last date of furnishing labor or materials, not from the date the retainage was supposed to be released. A subcontractor who finished work months before final completion can see the lien deadline expire while still waiting for a retainage check that never arrives, leaving the retained balance unsecured. The defensive move is to track the lien filing and enforcement deadlines for the full contract value — progress balance plus retainage — from first furnishing. The Mechanics Lien Management State System calculates those deadlines for every active project across all 50 states.