What Is Retention in Construction?

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Retention is also commonly called retainage and is a term referring to the percentage of payment held back from a construction contract. This is a financial term and the owners of a building, or those who are paying for its work to be done, take the lead in drawing up and enforcing the retention plan. General contractors sometimes have retention plans as well.

Levels of Retention

  • There are two levels of retention. The first level of retention deals with the owner of a building under construction. That building's owner may establish a retention plan regarding his or her contractors and completion of the contract. The second level of retention involves general contractors who may set up a retention plan for subcontractors that they hire.

Purpose of Retention

  • Retention provides owners with knowledge that the project a contractor has signed must be completed if the contractor is to be paid for his or her work in its entirety. A retention plan often calls for the withholding of 5 percent to 10 percent of payment until the work is finished as promised. Also, retention ensures that items on the punch list, or the list of items that will vary after completion of a project, is completed in its entirety as well.

Examples of Retention

  • If an owner was building a home with five bedrooms she might agree to pay an electrician $20,000, or $4,000 per room, to service all five. Under a retention plan, the electrician would not receive 20 percent of what was completed until the entire job was completed. If the electrician quits after finishing four out of five bedrooms that means he or she would receive only 80 percent of the promised money, or $16,000.

Limitations of Retention

  • Retention is generally a good idea to include in a construction contract, but it is not applicable to all situations. Construction workers that handle stored materials usually cannot be forced to follow a retention plan. This includes those who provide and deliver materials needed to complete a project. Often, they must be paid up front with no retention guidelines in place. Retention plans also don't correct problems when contractors are disingenuous or dishonest about their work.

References

  • Photo Credit AzmanJaka/iStock/Getty Images
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