In a given construction project, those who are paying a contractor may withhold a percentage of an invoice. Typically, 5 to 10 percent of payment is withheld until the project is complete. This is referred to as retention, and there are several reasons why retention is valuable to a customer. Primarily, it provides an incentive for a contractor to finish the job before looking for a new contract.
For instance, if a contractor completes 95 percent of a job worth $100,000, he or she would have been paid $95,000 with another $5,000 owed. With 10 percent retention, that contractor has only been paid $89,500 and won't get the rest until the project is done. In some cases, there may be what is called a punch list of small items that need to be taken care of before the project can be considered finished.
A contractor will usually receive his or her withheld payment 30 days after the completion. However, it should be noted that retention might not be acceptable to all contractors or to vendors who provide materials. It also does not help a customer who chooses a poor or dishonest contractor to do the work.
Prior to agreeing to work with a contractor, it may be worthwhile to have a commercial law attorney create a binding contract. An attorney may be able to craft an agreement that adheres to applicable contract law and provides protection for a customer when it comes to when and how payments are made. Using retention may increase the odds that a project is completed to the satisfaction of the customer.
Source: Gaebler Ventures, "Retention’s Role in Construction", Brent Pace , January 05, 2015