What does the term 'retention' refer to in construction contracts?

In construction contracts, 'retention' specifically refers to a percentage of payment that is withheld by the owner or project manager until the completion of the project or a specific phase of work. This practice is designed to ensure that the contractor fulfills their obligations and finishes the work to the required standards. Retention serves as a financial incentive for contractors to address any punch list items and to rectify defects that may arise after the project is completed. Withholding this percentage helps protect the interests of the owner by ensuring that the contractor remains financially motivated to deliver a quality final product.

Understanding the concept of retention is crucial for both contractors and clients as it directly impacts cash flow and project financing. While some other terms mentioned, such as a security deposit or type of permit, may exist in construction contracts, they do not align with the meaning of retention in the context of payment structures and obligations. Similarly, the initial project budget is more related to overall project financial planning rather than the specific mechanism of withholding payments.