What does the term "retention" mean in construction contracts?

The term "retention" in construction contracts specifically refers to a portion of payment that is withheld until the project is completed to ensure that the contractor fulfills their obligations under the contract. This practice is a common risk management strategy used by owners or project managers, serving as an incentive for contractors to complete the work satisfactorily and on time.

Withholding a certain percentage of the payment—often around 5% to 10%—is designed to ensure that all work meets the contractual standards. It provides a financial incentive for contractors to address any issues that might arise even after substantial completion, ensuring high quality and preventing contractors from leaving any tasks unfinished.

As such, retention is not about paying subcontractors for early completion, providing advancements before project initiation, or punishing delays, but rather a method used to maintain quality assurance throughout the life of a construction project.