What does "retainage" mean in construction contracts?

Retainage refers to a portion of the payment that is intentionally withheld until the completion of a construction project. This practice is commonly used in contracts to ensure that contractors and subcontractors fulfill their obligations and address any potential defects or issues that may arise after the majority of the work is completed. By retaining a percentage of the payment, the project owner maintains leverage over the contractor to ensure the project is finished satisfactorily, which helps to ensure quality and timely completion.

In construction contracts, retainage can serve as a financial incentive for contractors to resolve any remaining work or problems before receiving the final payment. It's an important aspect of contract management and risk mitigation within the construction industry, aiming to protect the owner's investment until all contractual obligations are met.