Contractor App Builder

Progress Billing and Retainage Explained for Small Contractors (2026)

How schedules of values, pay applications and retainage work, with a worked pay app, current state rules from California and Texas, and how to keep retainage from choking your cash flow.

Floot ·

Key Takeaways

  • Progress billing pays you as work is completed. You bill a percentage of each line in an agreed schedule of values, usually monthly, instead of waiting for completion or relying on fixed milestones.
  • Retainage is money earned but held back. The owner or GC withholds a percentage of each payment, commonly 5 to 10 percent, until the job or your part of it is complete.
  • State law can cap it and set release deadlines. California limits retention on private contracts entered on or after January 1, 2026 to 5 percent in most cases; Texas requires owners to retain 10 percent for 30 days after completion for lien purposes.
  • The schedule of values decides your cash flow. Build it so early work is fairly valued, and get it approved before the first pay app.
  • Retainage is cash you have earned, so chase it. Track it by job, know the release trigger in your contract, and submit closeout documents promptly.

Quick-Start Prioritization Framework

TermWhat it meansWhat to do
Schedule of values (SOV)The contract price broken into line items that add up to the totalBuild it carefully and get it approved before work starts
Pay applicationYour monthly request for payment, showing percent complete per lineSubmit on the date your contract sets, with backup
Retainage (retention)A percentage of each payment withheld until completionTrack by job; know the cap and release trigger
Stored materialsMaterials bought for the job but not yet installedBill only if your contract allows, with invoices and proof of storage
Lien waiversReleases of lien rights exchanged for paymentUse conditional waivers until funds clear

The first time a small contractor takes on a job with progress billing and retainage, the paperwork looks like an exam. A schedule of values, a pay application with columns for work completed this period and previously, stored materials, retainage held, less previous certificates. Then the check arrives and it is 10 percent less than the work you did, and that 10 percent will not come back for months. This guide explains how progress billing works in plain terms, walks through a pay application with real arithmetic, summarizes current retainage rules in two large states and the federal default, and covers how to protect your cash. It is general information, not legal advice; your contract and your state’s law decide the details.

How progress billing works

Progress billing means you are paid in installments as work is completed, rather than in one payment at the end. On small residential jobs it often looks like milestone billing: deposit, rough-in, drywall, final. On commercial and larger residential jobs it usually means a monthly pay application measured against a schedule of values.

Milestone billing versus percent-complete billing

Milestone billing is simple and works well with homeowners: you bill a fixed amount when a visible stage is done. Percent-complete billing is more precise and is the norm on commercial work: each month you estimate what share of each line item is complete and bill that share, minus what you billed before.

Some states restrict how far ahead of the work you can bill on home improvement jobs. In California, for example, Business and Professions Code section 7159.5 prohibits taking payment for work not yet performed or materials not yet delivered on home improvement contracts, apart from the capped down payment.

The paperwork

Many owners and GCs use AIA Document G702 (the Application and Certificate for Payment) with G703 (the Continuation Sheet). According to AIA’s own description, G703 breaks the contract sum into portions of the work following the contractor’s schedule of values, and the pair shows work completed and stored to date, retainage, previous payments, a summary of change orders and the current amount requested. Others use their own format that carries the same information.

Building a schedule of values that pays you fairly

The schedule of values is the most important document in progress billing, and new contractors often treat it as an afterthought.

Break the job into measurable lines

Each line should be something you and the owner’s representative can both look at and agree on percent complete: site work, foundations, framing, roofing, rough plumbing, rough electrical, and so on. Lines that are too big (“Interior: 140,000”) cause arguments; lines that are too small make every pay app a chore.

Value the lines honestly, including general conditions

Your supervision, temporary facilities, insurance, dumpsters and cleanup are real costs spread across the job. Put them on their own general conditions line and bill them by percent of time elapsed or percent complete overall. If you bury them in the last lines of work, you finance the job for months.

Owners and their architects watch for front-loading, where early lines are overvalued so the contractor gets paid ahead. Fair is the goal: value each line at what it actually costs plus its share of overhead and profit, and you will rarely get pushback.

Add change orders as new lines

Approved change orders should appear as their own lines on the continuation sheet, not be folded into existing lines. That keeps the original contract and the changes separately visible, which helps everyone, including you when you reconcile at the end.

A worked pay application

Here is pay application number 3 on a 240,000 dollar contract with 10 percent retainage. All figures are illustrative arithmetic.

Through pay app 2, the value of work completed was 96,000 dollars. Retainage at 10 percent was 9,600, so the owner has paid 86,400.

This month, another 36,000 dollars of work was completed, bringing total completed to date to 132,000. Retainage on 132,000 is 13,200. Total earned less retainage is 118,800. Subtract the 86,400 previously certified, and the current payment due is 32,400.

So for 36,000 dollars of work this month, you receive 32,400. The other 3,600 joins the 9,600 already held. Over the whole job, 24,000 dollars will sit with the owner until the retainage release conditions are met.

Line on the pay app10% retainage5% retainage
Original contract sum240,000240,000
Total completed and stored to date132,000132,000
Retainage held13,2006,600
Total earned less retainage118,800125,400
Less previous certificates for payment86,40091,200
Current payment due32,40034,200
Retainage held at completion (240,000 contract)24,00012,000

What the difference means for a small company

On this one job, moving from 10 to 5 percent retainage frees 12,000 dollars at completion. If your net margin is around 6 to 9 percent, 24,000 dollars of retainage on a 240,000 dollar job can exceed your entire profit on it. Until it is released, you have done the work, paid your crews and subs, and your profit is effectively sitting in the owner’s bank account.

Retainage rules: what the law says in a few key places

Retainage is mostly set by contract, but many states cap it, require release by a deadline, or both, with different rules for public and private work. Below are three examples. Check your own state’s statute and your contract, and talk to a construction attorney for anything significant. This is general information, not legal advice.

California private works (2026 change)

Civil Code section 8811 applies to private works contracts entered into on or after January 1, 2026. It says retention withheld from any payment may not exceed 5 percent of the payment, total retention may not exceed 5 percent of the contract price, and a subcontract’s retention rate may not exceed the rate in the owner’s contract with the direct contractor. The cap does not apply when payment and performance bonds were required with written notice at bid time, and it does not apply to residential projects that are not mixed-use and are not more than four stories.

Section 8812 requires the owner to pay retention to the contractor within 45 days after completion of the work of improvement, and section 8818 sets a penalty of 2 percent per month on retention wrongfully withheld. Separate rules cover public works.

Texas private projects

Texas Property Code section 53.101 requires the owner to retain 10 percent of the contract price of the work for 30 days after the work is completed. This retained fund protects claimants who perfect lien claims. It is a statutory reserve, separate from any additional retainage the contract may set. Texas also has a prompt pay statute: Property Code section 28.002 generally requires an owner to pay within 35 days of receiving a payment request, and a contractor to pay subcontractors their share within 7 days of receiving the owner’s payment.

Federal construction contracts

Under FAR clause 52.232-5, progress payments are made monthly on estimates of work accomplished. The contracting officer may retain up to 10 percent of a payment when satisfactory progress has not been made, and must release remaining withheld funds at substantial completion, apart from an amount judged adequate to protect the government. Each payment request must certify that subcontractors and suppliers were paid from earlier payments. FAR 52.232-27 sets a 14-day due date for progress payments after a proper request, and requires the prime to pay subcontractors within 7 days of receiving payment.

Getting a pay application paid on time

Most late progress payments are not about money. They are about paperwork that was missing, wrong or late.

Know the cutoff and the approval chain

Your contract usually sets a billing date (often the 25th for a pencil draft and the end of the month for the final) and who approves it: owner, architect, lender, or the GC’s project manager. Miss the cutoff and you wait a full cycle. Put the dates in your calendar for every job.

Send a pencil draft first

On larger jobs, walk the site with the superintendent or owner’s rep and agree on percentages before you submit. Disagreements resolved on a draft cost a day; disagreements on a submitted pay app can cost a month.

Include the backup they will ask for

Typical backup: updated schedule of values, change order log, invoices for stored materials with proof of storage and insurance, your lien waivers, and your subs’ lien waivers for the previous payment. Lenders on construction loans often require all of it before releasing a draw.

Managing retainage as a small contractor

Retainage is a cash flow problem more than an accounting one. Treat it as an asset you are actively collecting.

  • Track retainage receivable by job, with the release trigger (substantial completion, final completion, a set number of days) and the expected date.
  • Pass retainage through to your subs at the same rate the owner holds from you, if your subcontracts allow it, so you are not financing their retainage too. In California, section 8811 already prevents a subcontract rate above the owner contract’s rate on covered contracts.
  • Negotiate before signing: ask for a reduction to 5 percent at 50 percent complete, line-item release for trades that finish early, or no retainage on stored materials.
  • Bill retainage separately once release conditions are met. Many contractors never send a retainage invoice and wait months longer than they need to.
  • Finish punch lists and closeout documents (warranties, manuals, as-builts, final lien waivers) quickly. Retainage is often held up by a missing O&M manual, not by work.
  • Know your lien and payment bond deadlines. Retainage held past a statutory deadline can expire your remedies if you do not act in time.

Common mistakes with progress billing and retainage

These cost small contractors real money every year.

  • Submitting the first pay app before the schedule of values is approved.
  • Burying general conditions at the end of the schedule of values.
  • Billing ahead of work on a home improvement contract where state law prohibits it.
  • Forgetting to add approved change orders as lines, then fighting about them at the end.
  • Signing unconditional lien waivers before the payment has cleared.
  • Not tracking retainage receivable, so it is forgotten until the next tax season.
  • Assuming a statutory cap applies without checking the exceptions, such as California’s exclusion for smaller residential projects.

If you would rather not track this on paper

If you’d rather not track pay apps and retainage in spreadsheets, construction billing software can produce AIA-style applications and retainage reports. If your process does not fit any product, an AI app builder such as Floot can build a small app from a plain-English description that holds your schedules of values, pay apps and retainage by job.

Frequently Asked Questions

What is retainage in construction?

Retainage, also called retention, is a percentage of each progress payment that the owner or general contractor withholds until the work, or a defined part of it, is complete. It gives the payer leverage to get the work finished and defects corrected.

What is the typical retainage percentage?

Five to 10 percent is common. Some states cap it. California limits retention on most private contracts entered on or after January 1, 2026 to 5 percent, with exceptions; federal construction contracts allow up to 10 percent when progress is unsatisfactory.

When does retainage have to be released?

Your contract and state law decide. In California private works, the owner must pay retention within 45 days after completion, with a 2 percent per month penalty for wrongful withholding. Texas requires owners to keep a 10 percent statutory reserve for 30 days after completion.

What is the difference between a G702 and a G703?

AIA G702 is the summary Application and Certificate for Payment. G703 is the Continuation Sheet that breaks the contract sum into the line items of your schedule of values and shows the detail behind the summary.

Can I bill for materials stored on site?

Only if your contract allows it, and owners usually want invoices, proof the materials are stored securely and insured, and sometimes a bill of sale. On home improvement contracts, check state limits on billing ahead of work.

Should I hold retainage from my subcontractors?

Many GCs hold the same percentage from subs that the owner holds from them, so cash flows match. Check your state’s rules first; some cap or limit sub retainage relative to the prime contract.

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