A percentage held back from each contractor payment as a performance guarantee until the project is fully complete.
Retention (also called retainage) is a percentage of each progress payment — typically 5% or 10% — withheld by the owner until the project achieves substantial or final completion to ensure the contractor completes all work and corrects deficiencies. The retained amount creates a performance incentive and a buffer against cost overruns. Many states have prompt payment laws limiting retention amounts and requiring timely release upon project completion.
Retention directly affects a contractor's cash flow and bid pricing — withholding 5-10% of every progress payment can tie up a contractor's profit margin until closeout, so estimators often build financing costs into their bids to cover the gap. Subcontractors must understand the retention terms flowing down from the prime contract before bidding, since aggressive retainage erodes margins on already-thin work. Retention also shapes risk: owners use it as leverage to compel punch-list completion and defect correction.
On a $2 million commercial buildout, the owner withheld 10% retention on each monthly draw, holding back roughly $200,000 that the general contractor could not collect until substantial completion and final punch-list signoff.
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