Kentucky retainage law: a plain-English guide for contractors

What is retainage in construction?

Retainage (also called retention) is the part of each progress payment the owner holds back until the work is finished. The general contractor usually passes the same percentage down to its subcontractors, so everyone in the chain has money held back.

"5% retainage" means that on a $200,000 pay application, $10,000 is withheld and $190,000 is paid. Over a long job the held amount adds up: on a $4 million subcontract at 5%, $200,000 is sitting with someone else by the end of the work. On your books it's a retainage receivable. On the GC's or owner's books it's retainage payable.

Retainage exists to give the owner leverage to get the work finished and to protect against unpaid subcontractors and suppliers filing liens. It also means contractors finance part of the project with their own earned money, often for a year or more.

Kentucky retainage caps: 10%, then 5%

Kentucky's Fairness in Construction Act sets the limits in KRS 371.410. Until a project is 50 percent complete, retainage can't exceed 10 percent of any undisputed payment. After that, total retainage held can't exceed 5 percent of the contract amount.

The caps apply at every tier, owner to contractor and contractor to subcontractor, and cover public projects and private non-residential projects (KRS 371.425). Residential construction is excluded, along with contracts entered on or before June 26, 2007, borrowers of USDA Rural Utilities Service funds, and utility facilities under KRS Chapter 278.

The Kentucky retainage escrow requirement

Under KRS 371.160, when a contract for improvement of real estate is $2 million or more and the owner holds back retainage, the retainage must go into a separate escrow account with a bank or trust company authorized to do business in Kentucky.

• It's the contractor's money. Once deposited, the funds are the "sole and separate property of the contractor to whom they are owed."
• Interest goes to the contractor. The escrow agent invests the funds, and at satisfactory completion, shown by the owner's written release, the funds and interest are paid immediately to the contractor.
• Reasonable fees. The escrow agent's fee is agreed by the owner, contractor and agent, must be commercially reasonable, and is paid from the account.
• It can't be waived. Since June 27, 2025, any contract term that waives the escrow requirement is void (KRS 371.405(2)(c)).
• Private work only. Contracts with the Commonwealth, cities, counties, school boards and other public bodies are exempt.

Senate Bill 76 (2025), effective June 27, 2025, raised the threshold from $500,000 to $2 million and added the waiver ban. The bill doesn't say whether it reaches contracts signed before that date, so check with counsel on older contracts.

How long can retainage be held in Kentucky?

Who pays whom: Deadline

Owner to contractor: Within 30 days after substantial completion. The owner may keep 200% of the reasonably estimated cost of the remaining work.

Contractor to subcontractor: Each sub's proportional share within 15 business days after the contractor receives it

Substantial completion takes three things: any required approval from public authorities, delivery of the required warranties and documentation, and the owner's ability to use and occupy the project for its intended purpose (KRS 371.410). Partial use alone doesn't count.

Interest and late payment in Kentucky

On private jobs of $2 million or more, the escrow interest belongs to the contractor. Late retainage carries interest of 12 percent a year from the first business day after it was due, and attorney's fees can be awarded against a party that acted in bad faith (KRS 371.415).

Progress payments follow KRS 371.405: the owner pays within 30 business days of a proper, undisputed pay request (45 for school boards and postsecondary institutions), the contractor pays subs within 15 business days of being paid, and late amounts carry 12 percent a year. Contract terms that waive lien rights or the right to sue, or bar damages for owner-caused delay, are void.

The money involved is real. $500,000 of retainage held for 18 months earns about $28,500 at 3.7% compounded monthly. Where nothing requires an escrow account, that interest usually stays with whoever holds the money.

Retainage escrow for Kentucky projects

On private Kentucky jobs of $2 million or more, the escrow account is required. Retain-Edge is built to run it: a segregated escrow account at a partner bank, a balance for every contractor, and the interest paid to the GCs and subcontractors who earned it. Retain-Edge never holds, lends or invests the funds, and is now enrolling pilot projects.

Get early accessCalculate your interest

Public projects in Kentucky

The 10% and 5% caps, the 30-day release after substantial completion, the 15-business-day flow-down to subs and the 12 percent late-payment interest all apply to public projects. The escrow requirement doesn't. Kentucky's general prompt pay statutes for state agencies and local governments (KRS 45.454 and 65.140) also set payment deadlines, and which rule controls on a public construction contract isn't fully settled.

How to get retainage released faster

1. Read the retainage clause before you sign. Look for the percentage, whether release is by scope or only at final completion, and what documents release requires.
2. Pin down substantial completion. Get the public approvals, warranties and documentation in early, so the 30-day clock can start.
3. Build the closeout package as you go. Collect warranties, O&M manuals, as-builts and certifications with your monthly pay apps instead of chasing them at the end.
4. Ask where the escrow account is. On private jobs of $2 million or more, retainage belongs in a separate escrow account at a Kentucky-authorized bank or trust company. Ask for the details in writing.
5. Ask for scope-level release. If your scope is finished, ask for your retainage to be released when your scope clears, not when the last trade finishes. Many contracts allow it.

Kentucky retainage FAQ

What is the maximum retainage in Kentucky?+

10 percent of each undisputed payment until the project is 50 percent complete. After that, total retainage can't exceed 5 percent of the contract amount (KRS 371.410). It applies to public and private non-residential work.

Does Kentucky require retainage to be held in escrow?+

Yes, on private contracts of $2 million or more. The retainage goes into a separate escrow account at a Kentucky-authorized bank or trust company, and the interest is paid to the contractor (KRS 371.160). Public contracts are exempt.

Can a contract waive the Kentucky escrow requirement?+

No. Since June 27, 2025, any waiver of the escrow requirement is void (KRS 371.405(2)(c)).

When must retainage be released in Kentucky?+

Within 30 days after substantial completion. The owner may keep up to 200 percent of the estimated cost of the remaining work.

When do subcontractors get their retainage in Kentucky?+

Within 15 business days after the contractor receives it, in proportional shares.

What happens if retainage is paid late in Kentucky?+

Interest at 12 percent a year, plus attorney's fees if the party that didn't pay acted in bad faith.

Does the Kentucky retainage law cover residential projects?+

No. The Fairness in Construction Act excludes residential construction.

How fast must owners pay progress payments in Kentucky?+

Within 30 business days of a proper, undisputed request (45 for school boards and postsecondary institutions), with 12 percent annual interest after that. Contractors pay subs within 15 business days of being paid.

Retainage guides for other states

California5% cap · 2%/mo late penaltyConnecticut5% cap · mandatory escrowFlorida5% public cap · 2%/mo lateGeorgia5% public cap · 10-day flow-downLouisianaEscrow at $50K+ · 10%/5% publicNew York5% cap · void above itNorth Carolina5% public cap · 50% stopOregon5% cap · retainage bondsTennessee5% cap · escrow at $500K+Texas10% reserve · public caps