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

Retention in construction contracts refers to the practice of withholding a percentage of payments due to the contractor until the completion of the project. This amount is typically held back to ensure that the contractor finishes the work satisfactorily and addresses any defects or issues that may arise after the work is completed. This practice acts as an assurance for the owner or client that the contractor will fulfill all contractual obligations, including completing any necessary repairs or finishing touches.

Retaining a certain percentage of the total contract price can incentivize the contractor to perform high-quality work and maintain a continued commitment to the project until it is fully complete. The amount retained is usually released to the contractor after a final inspection is done and any remaining issues are resolved, aligning the contractor's interest with the project owner’s desire for quality and completion.

The other options do not accurately describe retention. A full payment made upfront does not adhere to the principles of retention, as it does not involve withholding any funds until completion. A bonus for early completion represents an incentive rather than a retention strategy. Similarly, a penalty for delays does not reflect the concept of retention, which is specifically related to the withholding of payment rather than imposing fines for tardiness.