What is the purpose of retainage in construction contracts?

Retainage in construction contracts serves the essential purpose of ensuring that the construction project is completed satisfactorily. It involves holding back a certain percentage of the payment due to contractors or subcontractors until the project reaches completion and all contractual obligations have been fulfilled. This practice protects the project owner by providing financial leverage to encourage contractors to finish their work as specified in the contract, addressing any deficiencies, or resolving outstanding issues.

By retaining a portion of the payment, the project owner can motivate contractors to complete the project on time and to the required standards, minimizing the risk of incomplete work or defects. This mechanism reinforces the importance of adhering to project timelines and quality specifications, which is vital in construction management and contract law.

Other potential purposes of retainage, such as timely payment to subcontractors or covering specific costs, do not align fully with the primary goal of ensuring the overall completion and satisfaction of the project. Therefore, the focus of retainage remains firmly on the completion aspect rather than solely on financial timeliness or cost coverage.