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Retention, Bonds, and Lien Waivers

Reference Business Updated Jul 24, 2026

Why this matters

In commercial / larger construction work, payment isn't simple: customers hold back retention, may require bonds, and require lien waivers. A contractor entering this market needs to understand these mechanisms. Without understanding, the contractor may agree to terms that delay payment indefinitely or require bonds they cannot get.

Retention (retainage)

What it is

A percentage of each payment withheld until project completion:

  • Typically 5 to 10 percent of each invoice
  • Held until project complete
  • Released at final acceptance

Why customers withhold

  • Incentive for contractor to complete properly
  • Protection against defective work
  • Resource for fixing issues

Typical amounts

  • Residential / small commercial: 0 to 5 percent typical
  • Larger commercial: 5 to 10 percent typical
  • Public works: 5 to 10 percent typical (some states allow up to 20)
  • Federal: typically 10 percent

State limits

Many states limit retention:

  • Maximum percentage
  • Specific to public vs private work
  • Specific to project size

Verify state limit.

Release of retention

  • After project completion
  • After punch list complete
  • After final inspection
  • After lien waivers from subs

Typical timing: 30 to 90 days after final completion.

Bonds

Types of bonds

Performance bond

  • Guarantees contractor will complete the work
  • If contractor fails, bond pays customer to complete

Payment bond

  • Guarantees contractor will pay subs and suppliers
  • If contractor fails, bond pays them

Bid bond

  • Guarantees the contractor will accept the contract if awarded
  • For competitive bidding

License bond

  • Required for some contractor licenses
  • Protects customers from contractor wrongdoing

When bonds are required

  • Public works (often required)
  • Large commercial projects (often required)
  • High-risk customer (sometimes)
  • License bond (typically required for licensed contractor)

Cost

Bond premium:

  • 1 to 3 percent of bond amount
  • Specific to:
    • Bond size
    • Contractor's financial strength
    • Surety's assessment

For the bond: a significant annual premium.

Eligibility

Surety reviews:

  • Financial strength
  • Business history
  • Personal credit (owner)
  • Specific industry experience
  • Specific to bond size

Smaller contractors typically:

  • Can get smaller bonds easily
  • Larger bonds require strong financials
  • Specific underwriting process

Process

For each bond:

  • Application with surety
  • Financial documentation
  • Approval
  • Bond issued
  • Customer requires copy

Lien waivers

What a mechanic's lien is

A right to file a claim against property for unpaid work:

  • Contractor (or sub, or supplier) files lien
  • Property cannot be sold / refinanced until lien is resolved
  • Forces payment

Why customers want waivers

To prevent liens:

  • Customer pays contractor
  • Contractor signs waiver
  • Customer can sell property
  • Specific to amount paid

Two types of waivers

Conditional waiver

  • Conditional on payment receipt
  • Sub signs before payment
  • Becomes effective when payment received
  • More common in some areas

Unconditional waiver

  • Effective on signing
  • Sub signs after payment receipt
  • Customer's preference; contractor's risk

Most contractors prefer conditional (waiver only effective on actual payment).

Standard waiver

Each state has standard forms:

  • Conditional progress payment waiver
  • Conditional final payment waiver
  • Unconditional progress payment waiver
  • Unconditional final payment waiver

Customer (or escrow agent) provides; contractor signs.

When required

  • Each progress payment (typical for commercial)
  • Final payment
  • Specific to contract terms

Sub lien waivers

For GC's subcontractors:

  • GC requires sub to provide waiver before paying sub
  • Documents sub waiving lien rights
  • Protects GC from later lien claims

Specific to commercial work

For typical commercial contractor:

Payment terms

  • Progress payments monthly typically
  • Retention held back (5 to 10 percent)
  • Final payment after completion
  • Lien waivers exchanged at each payment

Bonds

  • Performance and payment bonds for larger jobs
  • Bid bonds for competitive bids
  • Specific contract requirements

Documentation

  • Each payment cycle:
    • Application for payment
    • Sworn statement of accounts payable
    • Lien waivers from subs
    • Sub COI updated
    • Project documentation

In practice for typical contractor

Small residential work

  • No retention typically
  • No bonds typically (except license bond)
  • Lien waivers sometimes (especially for major work)

Mid-size residential / small commercial

  • Some retention (often 5 percent)
  • License bond required
  • Lien waivers at final payment

Larger commercial

  • Standard retention (5 to 10 percent)
  • Performance / payment bonds required
  • Lien waivers at each progress payment

Public works

  • Standard retention per state
  • Bonds required (typical 100 percent of contract for performance and payment)
  • Lien waivers per contract

Specific issues

Retention not released

  • Final acceptance delays
  • Customer disputes
  • Specific dispute resolution

Bond claim

  • Customer claims against bond
  • Surety investigates
  • Pays customer if valid
  • Contractor pays surety back

Lien filing

  • Contractor files lien for unpaid work
  • Customer's title encumbered
  • Forces resolution

Bond decline

  • Surety declines to issue
  • Contractor cannot bid for jobs requiring bond
  • Strategic decision

Bonding capacity

A contractor's bonding capacity:

Aggregate capacity

  • Total bond exposure at one time
  • Typically 10x net worth or specific to surety

Single job capacity

  • Maximum single bond
  • Typically 5x net worth or specific to surety

Growing capacity

  • Strong financial performance increases capacity
  • Long surety relationship helps
  • Specific to track record

Common issues

Cash flow during retention

  • Retention is significant portion of profit
  • Held back during project
  • Released at end (sometimes much later than expected)
  • Plan for this

Bond costs

  • Add to bid cost
  • Customer ultimately pays
  • Verify bond requirement before bidding

Lien waiver mistakes

  • Signing unconditional before payment
  • Sub waiving without subs paid
  • Specific to documentation

Sub payment / lien

  • GC pays sub late
  • Sub files lien against customer's property
  • Customer impacted; GC liable to make whole

Best practices

Track retention

  • Each progress payment with retention amount
  • Total retention held
  • Expected release date

Track lien waivers

  • Each payment cycle
  • Each sub's waiver
  • File copies

Maintain bond capacity

References

  • State mechanic's lien statutes (each state).
  • State bond requirements.
  • AGC (Associated General Contractors) standard contract documents.
  • ConsensusDocs construction contracts.
  • AIA (American Institute of Architects) contract documents.
  • Surety industry resources.
  • Manuall internal: Universal Business Insurance Basics, Universal Indemnification Clauses.

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