What is the purpose of retainage in construction contracts?

The purpose of retainage in construction contracts is to ensure that the contractor completes the project satisfactorily before receiving the final payment. Retainage is a percentage of the payment that is withheld until the completion of the project to guarantee that all work meets specified standards and requirements. This practice helps to protect project owners from incomplete or unsatisfactory work by providing a financial incentive for contractors to resolve any outstanding issues or defects.

By holding back this portion of the payment, the owner has leverage to ensure that quality standards are upheld throughout the project and any necessary corrections are made before the contractor is paid in full. Retainage is commonly understood within the construction industry as a way to encourage accountability and thoroughness in project completion, thus ensuring overall customer satisfaction and project quality.