Retention money

3 key takeaways

• Retention money is withheld to ensure the contractor fulfills all contractual obligations.
• It provides a financial incentive for the contractor to complete the project satisfactorily.
• The retention money is usually released after a specified period, often after the completion and inspection of the project.

What is retention money?

Retention money is a contractual practice in construction and other projects where a portion of the payment to the contractor is withheld by the client. This withheld amount, typically a percentage of the total contract value, serves as a financial safeguard for the client to ensure that the contractor completes the project according to the agreed specifications and quality standards.

The retention money is usually held until the project reaches completion and passes a final inspection or until the end of a defects liability period. This period allows the client to verify that any defects or issues that arise post-completion are addressed by the contractor.

Once all contractual obligations are satisfied, the retention money is released to the contractor.

How does retention money work?

The retention money mechanism operates through several steps:

• Contract agreement: At the start of the project, the client and contractor agree on a certain percentage of the total payment to be retained. This percentage is commonly around 5-10% of the contract value.
• Withholding payments: As the project progresses, the client withholds the agreed percentage from each interim payment made to the contractor. This continues until the project is completed.
• Completion and inspection: Upon project completion, a final inspection is carried out. If the project meets the contractual terms and quality standards, the initial portion of the retention money may be released.
• Defects liability period: A portion of the retention money is still held back during a defects liability period, which typically lasts for 6-12 months. This ensures any defects identified during this time are rectified by the contractor.
• Final release: After the defects liability period and satisfactory rectification of any issues, the remaining retention money is released to the contractor.

Importance of retention money

Retention money plays a vital role in project management for several reasons:

• Quality assurance: It provides a financial incentive for contractors to deliver high-quality work and comply with all contractual obligations.
• Risk mitigation: Retaining a portion of the payment helps mitigate the risk of project delays, poor workmanship, or failure to complete the project.
• Financial security: It acts as a security deposit for the client, ensuring that they have funds available to cover the cost of any necessary repairs or rectifications post-completion.

Understanding retention money is crucial for both clients and contractors to ensure successful project completion and financial security. For more on related financial terms and practices, you might want to explore topics like performance bonds, construction contracts, and project management.