Retention

Definition

Retention refers to the portion of funds that clients withhold from contractors until a project reaches certain milestones or is fully completed. This practice helps ensure that the contractor completes the work to the client's satisfaction and adheres to quality standards, thereby protecting the client from potential risks associated with incomplete or unsatisfactory work.

5 Must Know Facts For Your Next Test

1. Retention is typically set as a percentage of the total contract amount, often ranging from 5% to 10%.
2. The withheld retention amount is usually released upon project completion or after a specified period of satisfactory performance.
3. Retention serves as an incentive for contractors to complete work on time and to the required quality standards.
4. The practice of retention is common in construction contracts and can vary based on industry norms and specific contractual agreements.
5. Retention can affect cash flow for contractors, as it reduces the amount of money they receive during the project.

Review Questions

• How does retention impact the relationship between contractors and clients during a construction project?
  • Retention creates a financial incentive for contractors to maintain high standards throughout the duration of a project. By withholding a portion of payments, clients can ensure that contractors remain committed to completing the work satisfactorily and on time. This arrangement fosters accountability, as contractors are motivated to address any issues promptly to secure their final payment.
• Discuss how retention practices vary across different types of contracts and what factors might influence these variations.
  • Retention practices can differ significantly depending on the type of contract, the size and scope of the project, and industry standards. For instance, public sector contracts may have stricter retention policies compared to private contracts. Additionally, factors such as project complexity, risks involved, and previous experiences with contractors can influence how much retention is withheld and under what conditions it is released.
• Evaluate the advantages and disadvantages of using retention in construction contracts for both clients and contractors.
  • The use of retention in construction contracts offers several advantages, including providing clients with assurance that work will be completed to their satisfaction and incentivizing contractors to deliver quality results. However, it can also pose disadvantages, particularly for contractors who face cash flow challenges due to delayed payments. For clients, excessive retention may deter quality contractors from bidding on projects if they feel the financial risk is too high, potentially limiting competition and impacting project outcomes.

Related terms

Progress Billing: A method of billing that allows contractors to bill clients for work completed up to a certain point in time, rather than waiting until the entire project is finished.

Contractor Default: A situation where a contractor fails to fulfill their obligations under a contract, which can lead to financial loss for the client.

Completion Bond: A form of insurance that guarantees the completion of a project, often used to protect clients from contractor default.