A contractor receives a $500,000 progress payment with 10% retainage held. If the contractor's overhead and profit margin is 15% and material costs for this billing period were $200,000, what is the total amount of retainage being held?
Correct Answer
C) $55,556
The total work completed is $500,000 ÷ 0.90 = $555,556. The retainage held is 10% of the total work completed: $555,556 × 0.10 = $55,556.
Why This Is the Correct Answer
Option B is correct because retainage is calculated on the total work completed, not just the payment received. Since the contractor received $500,000 after 10% retainage was held, this represents 90% of the total work value. To find the total work completed, we divide $500,000 by 0.90 to get $555,556. The retainage held is then 10% of this total amount, which equals $55,556.
Why the Other Options Are Wrong
Option B: $50,000
This incorrectly attempts to factor in the 15% overhead and profit margin, which is irrelevant to retainage calculations. Retainage is calculated on the total contract value regardless of the contractor's markup structure.
Option D: $57,500
This appears to calculate retainage on some arbitrary reduced amount, possibly confusing material costs or other factors. It doesn't follow the proper retainage calculation methodology of finding the total work value first.
Memory Technique
Remember 'BIRD' - Backwards calculation, Identify total work, Retainage on total, Disregard markup percentages. Always divide the net payment by the percentage actually paid to find the gross amount first.
Reference Hint
Florida Building Construction Standards - Chapter on Progress Payments and Retainage, or Florida Statutes Chapter 713 regarding construction liens and payment procedures
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