What is 'retainage' in construction contracts?

Retainage in construction contracts refers to a specified amount that is intentionally withheld from progress payments made to contractors. This financial practice is designed to ensure that the contractor completes the project satisfactorily and meets all contractual obligations. By retaining a portion of payment, the project owner protects themselves against the risk of incomplete work or defects that may arise after initial payments are made.

Typically, this retained amount is released to the contractor upon satisfactory completion of the project, providing an incentive for contractors to fulfill their obligations and ensuring quality control throughout the project. The usage of retainage serves to align the interests of both contractors and project owners, helping to ensure that the work is completed to the required standards and within the agreed time frame.