A contractor submits a payment application for $125,000. The contract specifies 10% retainage on all payments. What amount should the owner pay?
Correct Answer
A) $112,500
With 10% retainage, the owner withholds 10% of the payment application amount: $125,000 × 0.10 = $12,500. The payment amount is $125,000 - $12,500 = $112,500.
Why This Is the Correct Answer
Retainage is withheld from each payment to incentivize project completion. With 10% retainage: Amount withheld = $125,000 × 10% = $12,500. Amount paid = $125,000 − $12,500 = $112,500. This is a straightforward application of the retainage formula.
Why the Other Options Are Wrong
Option B: $137,500
$137,500 would result from ADDING 10% to the payment application amount ($125,000 + $12,500). This reverses the direction of retainage — retainage is withheld (subtracted), not added to the payment.
Option C: $115,000
$115,000 results from withholding only $10,000 (applying an 8% rate) or a simple arithmetic error. It does not correspond to a 10% retainage on $125,000.
Option D: $125,000
$125,000 represents paying the full application amount with no retainage withheld — ignoring the contract requirement entirely. Always apply the stated retainage rate.
Memory Technique
RETAINAGE = RETAINED = kept back. The owner retains (holds back) a percentage until the project is complete. Payment = Application × (1 − Retainage%). Here: $125,000 × 0.90 = $112,500.
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