Retention refers to a portion of the payment due to a contractor that is withheld by the client or main contractor to ensure that all work is completed satisfactorily and according to the contract specifications. Typically, this amount is a percentage of the contract value, held back as a financial safeguard until the project’s completion or until any defects are rectified during a specified defect liability period.
Key Features:
- Financial Safeguard: A percentage of the contract value is retained to ensure compliance with contract terms and quality standards.
- Incentive for Quality: Encourages contractors to complete their work to the required standards and promptly address any defects.
- Defect Liability Period: The retention is usually held until the end of this period, during which the contractor is responsible for rectifying any identified issues.
Benefits:
- Client Protection: Ensures that the client has a financial guarantee that the contractor will fulfill all contractual obligations.
- Quality Assurance: Provides a strong incentive for contractors to deliver high-quality work and promptly address any post-completion issues.
- Risk Mitigation: Reduces the risk of incomplete or substandard work by withholding final payment until all requirements are met.
Process:
- Retention Percentage: A specific percentage of each payment is withheld, typically ranging from 5% to 10% of the contract value.
- Release of Funds: The retained amount is usually released in two stages:
- Upon Practical Completion: A portion of the retention is released when the project is substantially complete and ready for use.
- End of Defect Liability Period: The remaining retention is released after the defect liability period, once all identified defects are corrected.
Common Practices:
- Contract Specification: The terms of retention, including the percentage and conditions for release, are specified in the construction contract.
- Regular Inspections: Ongoing inspections during the project help identify issues early, reducing the likelihood of significant defects at completion.
