Retainage is a percentage of each progress payment that an owner withholds from the General Contractor until the project reaches substantial completion or another agreed milestone. It gives the owner a financial hold to make sure the work gets finished correctly. On commercial construction projects in Michigan, retainage terms are governed primarily by your contract, not by a state-mandated formula, which makes what you negotiate before signing far more important than most owners realize.
What Retainage Is and Why It Exists
Retainage typically runs 5 to 10 percent of each progress payment on a commercial project. Ten percent is common on smaller jobs; 5 percent is more typical on larger ones. It serves two purposes: it gives the Contractor a financial incentive to close out punch list items, and it gives the Owner a cushion if defects show up after substantial completion.
Retainage is not a penalty. It's withheld money the Contractor has earned and will receive once the release conditions spelled out in the contract are met.
How Michigan Law Governs Retainage on Private Projects
Michigan's Construction Lien Act, codified at MCL 570.1101 et seq., is the primary statute governing retainage on private commercial projects. MCL 570.1109 addresses payment obligations and lien rights, and it's the section owners should understand before signing a construction contract.
Michigan does not have a prompt payment statute with real enforcement teeth for private commercial work. Unlike some states, Michigan doesn't mandate retainage release timelines on private projects. That means the terms in your contract control when and how retainage gets paid out. If the contract is vague on release conditions, you're left arguing about intent instead of enforcing clear language.
How Retainage Flows From Owner to GC to Subcontractors
When an Owner withholds retainage from the General Contractor, that withholding cascades down the payment chain. The GC typically withholds a matching percentage from each subcontractor, who may in turn withhold from their sub-subcontractors and suppliers.
On standard AIA G702/G703 payment application forms, used on most commercial projects in Michigan, the retainage column on each pay application shows the cumulative amount withheld to date.
Under the Michigan Construction Lien Act, subcontractors and suppliers who don't receive their retainage can file a construction lien against the Owner's property, even if the Owner paid the GC in full.
Owners who set retainage above 10 percent can inadvertently drive away qualified subcontractors, particularly in markets where the subcontractor pool is smaller. Tighter sub margins in recent years have made high-retainage jobs less attractive to the best trade contractors. Subs who price jobs knowing retainage will be held for 12 or 18 months often build a financing cost into their bids. Owners who withhold 10 percent may end up paying more in inflated sub bids than they gain in protection.
When and How Retainage Gets Released
Retainage is typically released in one or two stages. The first is a partial release at substantial completion, when the building is occupiable and functional. The second is a final release after the punch list is closed and unconditional lien waivers are collected from all subcontractors and suppliers.
Before releasing retainage, the Owner should require three things: a certificate of substantial completion, a completed punch list, and unconditional lien waivers from the GC and all subcontractors and suppliers of record.
The most common owner mistake is releasing retainage before collecting unconditional lien waivers from all subs and suppliers. Owners who do this remain exposed to lien claims even after paying the GC in full. This is the scenario described in our article on paying twice when subcontractors don't pay their bills.
Retainage reduction clauses are worth negotiating before signing. Some contracts reduce retainage from 10 percent to 5 percent at 50 percent project completion once the work is demonstrably on track. This preserves owner protection while improving subcontractor cash flow.
Construction loan lenders often have their own requirements about retainage release timing and documentation. Owners financing through a construction loan should confirm their lender's requirements before releasing any retainage.
Four Retainage Mistakes Michigan Owners Make Before the Contract Is Signed
Most retainage problems on commercial projects trace back to contract language that was vague, one-sided, or simply not negotiated before the project started.
- Not specifying retainage reduction milestones. Contracts that hold 10 percent through project completion with no reduction clause are common but avoidable. Imagine a commercial owner who negotiates a reduction from 10 percent to 5 percent at 50 percent completion. At the midpoint, the Owner releases half the withheld retainage, improving subcontractor cash flow while preserving meaningful protection through the punch list phase. That's a labeled hypothetical, but it reflects how experienced owners structure these terms.
- Setting retainage above 10 percent. Owners who push retainage to 15 percent or higher often lose access to the best subcontractors, who have enough work to be selective about high-retainage jobs.
- Confusing retainage release with lien waiver collection. These are two separate steps. Releasing retainage without collecting unconditional lien waivers from all subs and suppliers leaves the Owner exposed to lien claims.
- Not addressing retainage in tenant improvement leases. In TI situations where the landlord controls payment terms, tenants who don't negotiate retainage provisions upfront can find themselves caught between the landlord's payment schedule and their Contractor's cash flow needs.
How Delivery Method Affects Retainage Structure
Retainage works differently depending on whether your project uses traditional General Contracting, CM at Risk, or Design-Build delivery. Owners who don't ask about this during preconstruction often discover the differences at the worst possible time.
Traditional General Contracting: Retainage is straightforward. The Owner withholds from the General Contractor, who withholds from subs. The contract terms govern everything.
CM at Risk: The Construction Manager holds contracts directly with subcontractors. Retainage flows from the Owner to the CM and from the CM to each trade contractor. The Owner has more visibility into sub-level retainage but also more complexity in the release process.
Design-Build: Retainage is typically structured in the contract between the Owner and the Design-Builder. The Design-Builder manages retainage with its own trade contractors. Owners in Design-Build arrangements should confirm that retainage terms flow down to subs in the same way they would under a traditional GC contract.
Regardless of delivery method, the preconstruction phase is the right time to negotiate retainage terms. Once construction starts, retainage disputes are expensive and disruptive.
Retainage terms are easier to negotiate before the contract is signed than to dispute after construction starts. Wolgast is a Michigan-based, employee-owned commercial contractor with established subcontractor relationships across mid-Michigan and statewide. We manage retainage transparently and can walk you through what terms make sense for your project type and budget.
Frequently Asked Questions
Can a subcontractor put a lien on my property if the GC doesn't pay their retainage?
Yes. Under the Michigan Construction Lien Act, subcontractors and suppliers who are not paid, including unpaid retainage, can file a construction lien against the Owner's property even if the Owner paid the GC in full. Collecting unconditional lien waivers from all subs and suppliers before releasing final retainage is the primary protection against this exposure.
What happens to retainage if my Contractor goes bankrupt mid-project?
If a General Contractor becomes insolvent during construction, withheld retainage may become part of the bankruptcy estate, complicating the Owner's ability to use those funds to complete the project. Owners in this situation should consult legal counsel immediately. This is one reason why contractor financial stability and bonding capacity matter before you sign a contract.
Is there a maximum retainage percentage under Michigan law?
Michigan law does not set a statutory cap on retainage for private commercial projects. The percentage is determined by contract. Industry norms run 5 to 10 percent, with 10 percent common on smaller projects and 5 percent more typical on larger ones. Public and bond-funded projects may have different rules under Michigan public contracting law.
Do public school construction projects in Michigan have different retainage rules?
Yes. Bond-funded public school construction in Michigan operates under public contracting law, which imposes different requirements than private commercial projects. School Districts planning bond-funded construction should confirm applicable retainage rules with their legal counsel and Construction Manager before contracts are executed.
Should I reduce retainage to attract better bids?
Reducing retainage can make your project more attractive to qualified subcontractors, particularly in markets with a smaller trade contractor pool. A retainage reduction clause tied to project milestones, such as dropping from 10 percent to 5 percent at 50 percent completion, is a reasonable middle ground that preserves owner protection while improving sub cash flow.
Published September 2026 • Last reviewed September 2026