Retention in construction is an important yet mostly misunderstood part of construction finances management processes. This is designed to keep the project quality and time intact. Retention means that a specific portion of the contractor’s payment is withheld until the project’s completion. Although this practice has more advantages to project owners by providing leverage for quality assurance to contractors, it also creates cash flow challenges for contractors.

In this blog, we will explore retention in construction, how it works, its purpose, and best practices for effectively managing it. We will also address the challenges and provide actionable solutions tailored to project owners and contractors, focusing on the U.S. construction industry.

What is Retention in Construction?

Retention in construction means that one can hold back a specific percentage of payment from any contractor or subcontractor for a project. This left-over amount, referred to as “Retention Money,” is a funds protection mechanism for project owners. Typically, retention is estimated to be about 5% to 10% of the contract amount and is withheld from each payment made to the contractor during the capital project process.

Retention is a practice project owners adopt to deal with defects or ensure that the contractors complete their work. It benefits the owner, and helps contractors be more productive in terms of quality, and keeps the project on schedule. 

How Does Retention in Construction Work?

• Contractual Agreement: The terms regarding retention are typically used in the construction contract offered by the employer. This contract covers the percentage to be withheld, the terms and conditions for its release, and the time that retainage will be retained.
  
  
• Withholding Payments: Throughout the work progression, a certain percentage of each payment made to the contractor is retained as retention money. For instance, if a contractor is contracted to execute a $1 million project with a 5% retention clause, $50,000 would be retained throughout the project’s duration. 

Retention amounts are typically released in two phases:

• Substantial Completion: A portion of the retention (preferably 50%) is paid out after a project has been substantially completed, which means the structure is usable. The project meets most of the contractual obligations. 
  
  
• Final Completion: The balance retention is paid after the project’s end has been certified and after it has met all the agreed-upon requirements regarding defects or punch list items.

Purpose of Retention in Construction

• Quality Assurance: Retaining is a financial incentive for the contractors to maintain the quality of the work from the start to the completion of the project. Owners ensure contractors stick to delivering quality work by withholding the payment. 
  
  
• Completion Guarantee: Retention gives project owners some control over whether all aspects of the project are handled to their expectations. If problems arise during inspections, the retained funds can be used to resolve or hire another contractor.
  
  
• Risk Management: Project owners manage risks mainly associated with additional or defective work by keeping money. This practice helps safeguard the investment by assuring them that contractors will be accountable for fulfilling their duties.

How Long can Retention Money be Held for?

When retention money can be held, it also differs because of the variation of the states’ and countries’ contract laws and contract conditions. Generally, retention is held during two main phases of the capital project:

• Project Execution Phase: A percentage is rightfully retained until practical completion. This phase checks to ensure that work completed before the next phase meets the quality standards. 
  
• Defect Liability Period: After practical completion, retention money is kept for a further period (ranging from 6 months to 2 years) to allow time for correcting defects and addressing any claims that may arise after completion. 

Challenges in Retention Management

• Cash Flow Issues: Contractors often face difficulties due to withheld payments. This can hinder their ability to pay subcontractors and manage ongoing expenses effectively.
  
  
• Disputes Over Release: Owners and contractors may disagree about when retention should be released, mainly because of differing contract terms or interpretations of performance standards.
  
  
• Administrative Burden: Managing retention requires meticulous record-keeping and monitoring of performance metrics throughout the project lifecycle. Failure to maintain clear documentation can lead to confusion and disputes later on.

Best Practices for Managing Retention in Construction

For Owners

• Clear Contractual Terms: To eliminate misunderstandings, ensure contracts should have a clearly outlined retention percentage, the conditions under which the data would be released, and the period of data retention.

• Regular Communication: Keep contractors updated with open communication of performance standards expectations and any problems that may occur during project executions. 

• Timely Release of Funds: As soon as contractual obligations are fulfilled and existing problems with quality are solved, it is vital to release the retained funds to contractors, which is beneficial in terms of building good relations with contractors.

For Contractors

• Understand Contract Terms: Ensure you read the contracts related to retention thoroughly to avoid any misunderstanding during the payment or payment schedules. 

• Maintain Quality Standards: Ensure quality work from the beginning of the project to the closing phase to avoid disagreement on the retained amount.

• Document Performance Metrics: Document each work done and any reports concerning performance or defective product resolution to support timely claims. 

Conclusion

Retention in construction ensures timely risk mitigation, quality checks, and project completion, but it can also create cash flow challenges and administrative burdens. Retention management needs good communication and properly drafted contracts. The owners and contractors can overcome these challenges by adopting best practices and using advanced tools.

To help ease retention management, OnIndus has expertise in integrating advanced tools into your PMIS. e-Builder integration helps in proper documentation track retention, ensures timely payments, streamlines workflows, minimizes conflicts, and enhances collaboration. With OnIndus, achieve better project quality, efficient processes, and maximum benefits.

Upgrade your retention management with the help of OnIndus today! Contact us today to enhance construction projects and get the best outcomes possible.