What does "retainage" mean in construction contracts?

Retainage in construction contracts refers to a portion of the payment that is withheld from the contractor until the project's completion to the owner's satisfaction. This practice is used as a financial incentive for the contractor to complete the work according to the agreed-upon terms and to ensure that any necessary corrections or incomplete tasks are addressed before full payment is made. By withholding this amount, the project owner protects their investment and encourages timely and quality completion of the work, as the contractor has a vested interest in resolving any outstanding issues to receive the retainage.

This concept helps mitigate risks associated with construction projects and addresses potential concerns regarding the quality of work, ensuring that the project meets the required standards before final payment is issued.