Retention, or retention money, is money a client holds back from the progress payments it owes you, as security in case you do not finish the work or fix defects. It is common in commercial construction and in subcontracts under a builder, and rare on work for homeowners. A contract with retention usually says what percentage of each claim is held, the cap on the total held, and when it is released. A common pattern is to release half at practical completion and the rest at the end of the defects liability period, once any listed defects are fixed. Some contracts let the contractor provide a bank guarantee or insurance bond instead of cash retention.
Retention is your money, held by someone else, often for a year or more, and it is at risk if the client gets into financial trouble before releasing it. Some states require head contractors on larger projects to hold retention money in a trust account; check with your state's building regulator for whether that applies to your work.
In practice
A plumbing subcontractor signs an $80,000 contract that holds 10 per cent of each claim, up to a cap of 5 per cent of the contract, which is $4,000. The first claim is $30,000, and $3,000 is held. The second is another $30,000, and only $1,000 is held, because the cap is reached. The third claim, $20,000, is paid in full. At practical completion, half the retention, $2,000, is released. Twelve months later, with no defects outstanding, the plumber claims the final $2,000.
Two things to do when you take on work with retention. Price it, because the money you will not see for a year costs you, and on thin margins retention can be most of the profit on the job. And diary the release dates the day you reach practical completion, then claim each release in writing on time. Retention that nobody asks for has a way of being forgotten, and the longer it sits, the harder it is to collect.