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The Creeping Retainage Vine

We’re all too familiar with the challenges the construction trades are facing going into the next 24-month cycle.


Labor shortages, supply chain disruptions, hard cost escalations, soft cost inflation, and logistics issues with CDL shortages— it seems the only things we’re not short of are challenges these days. Thankfully, too much opportunity is a great challenge to have IF we remember the nature of the opportunity can change the risks it carries with it.


Retainage is one of those risks. 


It’s expected. You try to get it waived or redline it and hope nobody catches it on the signed copy but, more often than not, it’s just another accepted part of the cost of doing business.


Remember, though, it’s a percentage, so it scales. As your costs scale, so does the impact on your cash flow. As an example, say you’ve got a $30,000,000 project that would have been a $26,000,000 project last year; the project has a 5% retainage and a 10-month window to substantial completion. 


First, the obvious. At the end of this project last year, you would have floated a total of $1,300,000. But this year, due to the cost explosion, you’re floating an extra $200,000 ($1,500,000). Again, this variance scales. In other words, on how many projects will this be a factor? 3 projects mean you’re floating $600,000 more this year than last year. Is your liquidity ready to carry that extra burden on cash flow?

In January of this year, AGC released a finding indicating that 89% of their responding members had reported experiencing delays on their projects. It would be impractical not to consider the impact of delays. 


In the above $30,000,000 example, you’re running off $3,000,000 a month which includes your 5% retainage. After five months, you’ve got $750,000 out when that delay hits. On top of the liquidated damages, how long can you float that extra retainage? 


Time to hit the usual place, the bank line….that's what it's there for, right?


Unfortunately, you must remember that the Fed just raised interest rates and has more increases scheduled. Don’t let a profitable year turn into a painful search for the hole in your pocket. If you’re interested in best-in-class tools to avoid these hurdles, we’re just a phone call away. 


 

Ken Fontana, Surety Manager

Cottingham & Butler’s Risk Management Division


Ken began his career in the insurance industry in 1996 at the corporate offices of Horace Mann Insurance. After relocating to Wyoming, he spent several years managing corporate safety programs, insurance, and claims as the RMO for a nationally exposed company engaged in numerous state and federal contracts including operations at three military bases, the Denver Federal Center, and HUD program management. He has been a licensed insurance agent for 20 years with the last 10 focused strictly on contract and commercial surety. Ken’s relationships with the nation’s top sureties and his experience give him a uniquely well-rounded approach to your overall surety, bonding, and subcontractor default insurance needs.

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