What does “retention” refer to in construction contracts?

In construction contracts, "retention" refers to a percentage of payment that is withheld until the project is completed to ensure that the contractor fulfills all aspects of their obligations. This practice serves as a safeguard for the project owner, providing an incentive for the contractor to finish the work to a satisfactory level and to address any issues that may arise during the project completion phase. By withholding a portion of the payment, the owner ensures they have leverage to ensure any outstanding work, repairs, or corrections are made before the final payment is released.

Retention typically applies throughout the duration of the project and is released upon substantial completion or when the project has been fully completed, depending on the terms outlined in the contract. This concept helps maintain quality and accountability within the construction process, which is crucial for minimizing defects and ensuring the overall success of the project.