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What is retention in construction

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Discover the significance of retention in construction projects and how it ensures successful project completion. Learn about the benefits, legal aspects, and frequently asked questions associated with retention in the construction industry.

In the realm of construction, the term "retention" holds immense importance. It refers to a specific portion of the contract sum that is withheld by the employer or client until the completion of a project. This retention acts as a safeguard against potential defects, delays, or other issues that may arise during the construction process. By retaining a portion of the payment until project completion, both parties involved ensure that the project meets the desired standards and specifications. Let's delve deeper into the concept of retention in construction and its significance within the industry.

Why is Retention Essential in Construction Projects?

  1. Quality Assurance and Defect Rectification

    • Retention serves as an incentive for contractors to complete projects to the highest standards.
    • It allows the employer to retain a portion of the payment until any defects are rectified.
    • This ensures that the final product meets the specified quality requirements, offering peace of mind to the client.
  2. Encouraging Timely Completion

    • Retention acts

Construction Retentions in the US: An Expert Review

In the realm of the construction industry, various financial mechanisms are employed to ensure project completion and mitigate risks. One such mechanism is construction retentions. This review aims to provide a comprehensive understanding of what construction retentions are in the context of the United States. By examining their purpose, underlying principles, and how they operate, we can shed light on their importance in the construction sector.

Understanding Construction Retentions:

Construction retentions, also known as retainage or retention money, refer to a portion of a contractor's payment that is withheld by the client (typically the project owner) until the completion of the project or a specific milestone. The withheld amount is typically a percentage of the contract value and serves as a form of security against potential defects, delays, or unsatisfactory work. This retention mechanism ensures that contractors remain accountable for their performance and incentivizes them to deliver high-quality results.

Purpose and Benefits of Construction Retentions:

The primary purpose of construction retentions is to safeguard the interests of project owners. By retaining a portion of the payment until project completion, owners can protect themselves from potential financial losses resulting from poor workmanship, defects, or non-compliance with contractual obligations. Retentions act as a form of

What is the purpose of retention?

The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract. Retention can also be applied to nominated sub-contractors, and the main contractor may also apply retention to domestic sub-contractors. In the US, this is known as Retainage.

What does retention mean in contracting?

Retention is security held by a procuring contractor to guarantee the performance of a suppling contractor and in particular to safeguard against defects in the event that the supplying contractor fails to satisfactorily rectify them.

What does 10% retention mean?

Retainage, also called retention, is an amount withheld from the contractor until a later date. It's fairly common, especially on commercial and public construction projects, and typically ranges from 5 - 10% of the total contract price.

How do you account for retention in construction?

When retention is subtracted from the invoice, the amount held is recorded as retention receivable. Once the project is complete and you're billing your customer for the retention that was held throughout the project, the amount then moves from retention receivable to accounts receivable.

Why is retention used in construction?

Retention is a percentage of payment held back typically by a client or main contractor under a construction contract to act as security, or an assurance that the project works will be completed and that defects which may subsequently develop are remedied.

What is retention time in construction?

What is retention in construction? Retention in the Construction sector is a sum of money withheld from a payment to a contractor / subcontractor until the contracted project is completed to a satisfactory standard within an agreed time period.

Frequently Asked Questions

What is the limit of retention in construction?

A common construction contract usually states that the amount of retention money is 5% of the contract's value or a 10% deduction for every progress payment you receive. You should see this amount of retention money in your payment invoice.

What is a retention receivable in construction?

Retention receivable is recorded by general contractors and subcontractors and is the number of funds due from a contractor's customer for retention. Because these funds aren't due until the project is completed, they are recorded in a separate account on the general ledger.

What is retention vs contingency in construction?

A retainage is an amount that is being withheld even though it has been earned. A contingency is an amount added to the estimate of the price of the project to cover unexpected costs.

How does retention work in construction contracts?

The purpose of retention — also known as retainage — is to incentivize contractors to complete a job according to the contract terms by withholding a portion of their payment until all agreed-upon project milestones have been met. It's like a risk management strategy to ensure job completion.

When the retention money will be paid to contractor?

'Practical Completion' is when the work is finished and signed off. At this stage, a certain proportion (usually half) of retention should be paid back to the sub-contractor. This figure is known as the first release of retention or first moiety of retention.

What is the difference between retention money and security deposit?

Whereas retention money is retained out of payments to be made to the developer. So security deposit is in excess to the contractual payments whereas retention money is part of contractual payments withheld subject to certain compliances.

What is the purpose of retention money?

Retention money is described as the sum of money held by the employer as a safeguard for any defective or non-conforming work by the contractor. This provision safeguards the employer by defects which can occur during the defects liability period if the contractor doesn't response according to the contract terms.

What is the standard retention rate in construction?

5%

Retainage is usually a percentage of the total project cost. It typically sits at 5% or 10%. When a project takes several months or years to complete, a construction retention payment is basically the legal withholding of payment for work already completed.

Is retention 5% or 10?

How Much Retention Money Can a Contractor Hold? A common construction contract usually states that the amount of retention money is 5% of the contract's value or a 10% deduction for every progress payment you receive. You should see this amount of retention money in your payment invoice.

When should you bill for retainage?

Progress billing allows you to invoice for work and material and collect payment from customers during the course of a project. Retainage is a percentage of an invoice that is billed when a project or phase is complete. The percentage is optional and is determined when the contract is signed.

What is a retention process?

Employee retention is the organizational goal of keeping productive and talented workers and reducing turnover by fostering a positive work atmosphere to promote engagement, showing appreciation to employees, providing competitive pay and benefits, and encouraging a healthy work-life balance.

What are the three types of retention?

Why it is important to split “retention” into three different types: customer retention, revenue retention, and policy retention.

What does retention mean in a contract?

Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate, that is deducted from the amount paid and retained by the client. The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract.

What is the difference between retention and retainage?

Retainage vs. retention: What's the difference? These two terms are often used interchangeably, but in certain cases the terms retainage and retention have different meanings. In construction, retainage may refer to the amount being held back, and retention could indicate the act of withholding the money.

FAQ

Who pays retention?

A retention bonus, also called retention pay or a retention package, is a lump sum of money a company pays to an employee to stay with the company for a specific amount of time.

What is a retention payment in construction?

When a contractor wins a bid for a large construction project, some of the money immediately goes to fund the start of the project. A construction retention payment (also called retainage) is the amount of money held back until the project is complete. Retainage is usually a percentage of the total project cost.

When should retention be released?

Typically, the first half of the retention is paid when the project is completed, whereas the second half is paid following the expiration of the defects liability period.

How is retention money released?

Typically, half of this fund is released on completion of the work and the second half at the end of the maintenance period, which can last for more than a year. However, it is common for companies to hang on to retention payments months after the defects liability period has ended.

How do you calculate retention in construction?

A common construction contract usually states that the amount of retention money is 5% of the contract's value or a 10% deduction for every progress payment you receive. You should see this amount of retention money in your payment invoice.

How do I claim retention money?
How Do I Recover Construction Retention?
  1. Calculate the contract due dates and final payment dates for the retention payments.
  2. Follow the contract or statutory payment notice procedures.
  3. If you do not receive a notice to pay less, seek legal advice.
What does retention mean in construction?

A construction retention payment (also called retainage) is the amount of money held back until the project is complete. Retainage is usually a percentage of the total project cost. It typically sits at 5% or 10%.

Is retention and retainage the same thing?

Retainage vs. retention: What's the difference? These two terms are often used interchangeably, but in certain cases the terms retainage and retention have different meanings. In construction, retainage may refer to the amount being held back, and retention could indicate the act of withholding the money.

What is retention money?

Retention money is described as the sum of money held by the employer as a safeguard for any defective or non-conforming work by the contractor.

What is an example of retention money in a contract?

Let me give you the illustration: Let's say you agreed to build a house with total contract price of CU 100 000 on 1 August 20X1. On 31 December 20X1, your client agreed to pay CU 30 000 based on the completion of walls and roof; with retention of 5% held until the building is handed over.

When should retention money be paid out?

Retained money is usually withheld from all parties until the very, very end of the project. On average, that means that general contractors wait about 99 days to get withheld money, and subcontractors (who likely finish before the general contractor) wait an average of 167 days.

How is retention money calculated?

Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate, that is deducted from the amount paid and retained by the client. The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract.

What is the purpose of retention in a contract?

The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract. Retention can also be applied to nominated sub-contractors, and the main contractor may also apply retention to domestic sub-contractors. In the US, this is known as Retainage.

Can you get out of a retention agreement?

Under the US National Labor Relations Act, employees have the right to find new employment. But if staff resigns before the date stipulated in their retention contract, they may be obligated to return any benefits they received in relation to the agreement.

What is retention in construction

How to calculate retention rate?

Various calculations can be used, but a sample retention rate formula is below: (Number of employees at the end of a set time period / the number of employees at the start of a set time period) x 100 = retention rate percentage.

What is a retention fee?

Retention is an amount of money withheld from a contractor until a job is complete. This normally is 5-10% of the contract's sum. It acts as a kind of security deposit: if defects are left by the contractor that they fail to remedy, the money is rightfully retained by the employer to fix those defects.

What is the purpose of the retention fee?

The purpose of retention — also known as retainage — is to incentivize contractors to complete a job according to the contract terms by withholding a portion of their payment until all agreed-upon project milestones have been met. It's like a risk management strategy to ensure job completion.

How does retention work in construction

Mar 3, 2020 — Retention payments are a percentage of milestone payments owed to a subcontractor or vendor. They are withheld pending full practical completion 

What percentage of retainage is typically withheld from each payment?

The percentage of retainage withheld is sometimes fixed and sometimes a matter of agreement, but is most commonly set between 5% and 10% of the total approved funds.

How do you calculate retainage in construction?

For example, if the complete project cost is $200,000 to be paid in five progress payments and the percentage to be retained is 5%, the calculation would be as follows: 200,000 x 0.05 = 10,000 total retainage amount. 10,000 divided by 5 = 2,000 retainage withheld from each progress payment.

How is retainage used in construction billing and payments?

Retainage is the withholding of a portion of the funds that are due to a contractor or subcontractor until the construction project is finished. It is meant to serve as a financial incentive and an assurance that the contractor will complete the project in a satisfactory manner.

What is the backup withholding rate for withholding payments made to the contractors?

24 percent

What is backup withholding? There are situations when the payer is required to withhold at the current rate of 24 percent. This 24 percent tax is taken from any future payments to ensure the IRS receives the tax due on this income.

How do you bill for retainage? Retainage is invoiced when a Description of Work on the Continuation Sheet is 100% complete, unless otherwise specified in the customer contract. Applications for Payment reflect deductions for retainage. Final invoices include retainage charges that were deducted from previous invoices.

How do you calculate contract retention?

Retention is an amount of money withheld from a contractor until a job is complete. This normally is 5-10% of the contract's sum. It acts as a kind of security deposit: if defects are left by the contractor that they fail to remedy, the money is rightfully retained by the employer to fix those defects.

What is retention in a construction contract?

A construction retention payment (also called retainage) is the amount of money held back until the project is complete. Retainage is usually a percentage of the total project cost. It typically sits at 5% or 10%.

What is the purpose of retainage in a construction contract?

Retainage is the withholding of a portion of the funds that are due to a contractor or subcontractor until the construction project is finished. It is meant to serve as a financial incentive and an assurance that the contractor will complete the project in a satisfactory manner.

What is the difference between retention and contingency in construction? A retainage is an amount that is being withheld even though it has been earned. A contingency is an amount added to the estimate of the price of the project to cover unexpected costs.

  • What is the meaning of retention period?
    • The retention period is how long a record must be kept by the University to meet state and federal laws.

  • What does retention mean contractors?
    • Often used in the construction industry, retention is a fixed percentage of the total payment due for a contract, withheld for a period after the work is completed.

  • Should retentions be Recognised as income?
    • The total amount relating to a contract needs to be included as income on completion. Watch our video tutorial to see our recommended method of recording retentions. This method records the total income but splits the retention into a separate balance sheet code to keep your debtors current and tidy.

  • How do you record construction retainage?
    • If you're owed retainage, the held-back amounts should be recorded as an asset, while whoever owes retainage should enter the amount as a liability. Retainage receivables will show as a debit balance, while retainage payables are considered a credit.

  • When can you claim retention?
    • Usually, this money can be claimed after the actual building's completion and/or after the defects liability period. But, if they are giving you a bad time in getting this money back, then you can file for adjudication. As mandated by law, the money retention can also happen while undergoing adjudication.

  • How do I account for retention money?
    • The retention payments should be recognized as a trade receivable, because the supplier has the right to invoice the amount to a customer based on the completion of a certain milestone. Let me give you the illustration: Let's say you agreed to build a house with total contract price of CU 100 000 on 1 August 20X1.

  • What percentage of a contractors money is typically held for retainage until work is satisfactorily completed?
    • Between 5-10%

      Today, retainage rates typically fall between 5-10%. But the conditions still largely remain the same as they did in the 1840s: if the work performed isn't of sufficient quality or doesn't match the scope of work, the project owner is within their right to withhold a portion of funds from any final payments.

  • What is a reasonable retention rate?
    • 90%

      What is a good employee retention rate? Generally, an average retention rate of 90% or higher is what to aim for, meaning a company will want an average employee turnover rate of 10% or less. In 2022, the average turnover rate2 was around 9.3%. But this varies by industry, location, and job type.

  • Should you accept a retention package?
    • I recommend employees take the retention bonuses offered to them without any regrets or feeling like they are being blackmailed. Retention bonuses are rightfully earned and will help motivate you to continue improving your skill set and the value that you offer your employer.

  • What is the downside of retention?
    • The downsides to high employee retention are disengaged employees who remain in their roles, hurt productivity, create toxic work environments, and drive good employees away. High retention can also lead to difficulty implementing change, less innovation, and a lack of diversity and inclusion.

  • Is a retention bonus a red flag?
    • If the reason is high turn-over and they want to keep clients, that might be a red flag. The company might have bigger issues, so you may want to reconsider. If the company's retention bonus reason is because of a critical project or they acknowledge your value, then you may want to stay.”

  • What is construction retention?
    • What Are Retention Payments in Construction? When a contractor wins a bid for a large construction project, some of the money immediately goes to fund the start of the project. A construction retention payment (also called retainage) is the amount of money held back until the project is complete.

  • How do you release retention money?
    • Getting Retentions Paid - Staying on Top of Dates

      'Practical Completion' is when the work is finished and signed off. At this stage, a certain proportion (usually half) of retention should be paid back to the sub-contractor. This figure is known as the first release of retention or first moiety of retention.

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