If you're hiring contractors to do some work on your home, the last thing you want is for them to walk off site leaving the job half-finished. One way to make sure the job gets done is through a retention. With a retention, you hold back or "retain" a percentage of the construction contract until the job is finished. The contractor only gets the retained amount when you're happy with the work he's done.
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Two Levels of Retention
There are two levels of retention. The first level is when you — the owner of the building under construction — hold back money until the contractor has completed the contract, including fixing up any defects in the work. You can negotiate a retention plan with the contractor before you sign the contract. The second level of retention is when the contractor holds back money from the subcontractors he hires. Legally, the main contractor is on the hook for the work done by subcontractors. Using a retention makes sure the subcontractor does the job properly, else he will not get paid.
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Amount of Retention
Retention gives you peace of mind that a contractor will complete the project in its entirety. If he doesn't, he loses money. A typical home-construction retention plan calls for the withholding of 5 to 10 percent of payment until the work is finished as promised, so that's a decent amount for the contractor to lose if he under performs. Some states limit the amount of retention. In Nevada, for example, you cannot hold back more than 5 percent of the contract amount. You pay the retention when items on the punch list, or the list of items that don't conform to the contract specification, is completed in its entirety. This means you won't get stuck with shoddy finishes or items that are of lower quality than expected.
Examples of Retention
If an owner was building a home with five bedrooms she might agree to pay an electrician $20,000, or $4,000 per room, to service all five. Under a retention plan, the electrician would not receive 20 percent of what was completed until the entire job was completed. If the electrician quits after finishing four out of five bedrooms that means he or she would receive only 80 percent of the promised money, or $16,000. This incentivizes the electrician to get the entire job done.
Limitations of Retention
Retention is generally a good idea to include in a construction contract, but it is not applicable to all situations. Construction workers that handle stored materials usually cannot be forced to follow a retention plan. This includes those who provide and deliver materials needed to complete a project. The contractor typically must pay for these items up front and they will be out of pocket if there's a retention. Bear in mind, too, that retention plans don't correct problems when contractors are disingenuous or dishonest about their work. Be sure to hire a reputable contractor, and get a solid contract in place.