Retention (Retainage)

Retention (the terms retention and retainage mean the same thing) is money the owner or construction lender keeps back from each payment to the builder. Instead of paying 100 percent of a completed milestone, the payer holds a slice, commonly 5 to 10 percent, in reserve. That held money accumulates over the job and is released near the end, once the work is finished and accepted.

The point of retainage is holdback power. It gives the owner a pool of the builder's own earned money that does not get released until the punch list is cleared and the home is fully complete. A builder who has 10 percent of every draw waiting at the finish line has a strong reason to come back and fix the last details rather than walking off to the next project.

Retention plugs directly into the draw schedule. Each time a draw is released, the retainage is subtracted and parked. For example, on a $700,000 Scottsdale build with 10 percent retention, a $140,000 framing draw pays out $126,000, and $14,000 is held. Across the whole project, that hold can total $60,000 or more, released after substantial completion and final acceptance.

Retention is not the same as a deposit or a contingency. A deposit is paid up front; retainage is held back from money already earned. A contingency covers unknown future costs; retainage covers the risk that known work is left unfinished. On a construction loan, the lender often sets the retainage rate and the release conditions, so owners should confirm those terms before signing. We structure clear retention terms so the held amount and its release point are never a surprise at closeout.