Contract Retention: Everything You Need to Know
A contract retention provides assurance to an individual that a job will be completed.3 min read
A contract retention is commonly used during construction for the following reasons:
- To protect an employer or a private individual from receiving incomplete services
- To provide the hired contractor with incentive to get the job done right
Contract Retention and Construction
A contract retention provides assurance to an individual that a job will be completed. For example, if someone hires a contractor to remodel his home, he will want to ensure that the contractor will complete the job before leaving. This can be done through a contract retention.
A retention works by holding onto or retaining a portion of the contract until the job is complete. Once the job is done and the individual that hired the contractor is satisfied, the contractor will receive the retained portion.
A standard definition of retention money is a percentage of money that an employer or an individual holds as protection from incomplete or inaccurate work done by the hired contractor.
A retention includes two levels:
- The hiring individual holds the money until the contract is fulfilled, and he or she is satisfied.
- The contractor holds the money from his or her subcontractors.
For the first level, the individual and the contractor will decide upon a retention plan prior to signing the contract. Upon issuance of the completion certificate, the first half of the retention money should be verified and released. Any incomplete or rejected work should be listed in the completion certificate. If the hired contractor refuses to complete the job, the applicable amount of money will be taken from the remaining retention money so that the individual can hire a third party to complete the job.
The purpose of the second level is to protect the main contractor. The main contractor is liable for the work done by any subcontractors (s)he or she hires; therefore, he or she can retain the subcontractors' payments until the job is properly completed.
The last half of the retention money will be verified and issued when the defects liability period ends. The standard for this period is 12 months. This means that the contractor is liable for any issues that occur during those 12 months due to poor construction. After this period is complete, a maintenance certificate is issued, and the last half of the retention money is released.
Contract Retention Amount and Purpose
By having a contract retention in place, the hiring individual can take comfort in knowing that the contractor is obligated to complete the project or lose money. Most private-construction retention contracts require retainment of anywhere from 5 to 10 percent of the payment. Therefore, if the contractor doesn't hold up his or her end of the bargain, a fair amount of money will be lost.
Depending on the state, a limit may be placed on the percentage of payment that can be withheld. For instance, the State of Nevada does not allow an individual to retain more than 5 percent of the total contract payment. When the project is complete to its exact specifications, the retention will be paid. This prevents the hiring individual from getting stuck with cheap or low-quality work.
For example, say an individual is building a four-bedroom house, and he or she hires an electrician to service all of the bedrooms for $16,000 total, or $4,000 per room. Further assume that the retention contract withholds 15 percent of the electrician's payment until the job is fully complete. If the electrician completes only three bedrooms, then he will only receive 85 percent of the payment, or $13,600. This retention plan provides the electrician with an incentive to do the job from start to finish to avoid losing any money.
It is important to understand that while a retention contract is a key tool in a construction contract, it is not always applicable. For example, if a contractor must use stored materials, he is usually not held subject to a retention contract. In this type of situation, the contractor must pay for the materials at the start of the project; if a retention is in place, he or she will be stuck paying for them out of pocket.
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