A Retention bond is a financial guarantee issued by a contractor to replace the need for retainage in a construction contract. Instead of withholding a percentage of payment, the project owner accepts a retention bond as security for completing outstanding work or defect corrections.
Why Retention Bonds Are Used
Retention bonds allow contractors to receive full payments while still assuring owners that post-completion obligations will be met. They improve contractor cash flow while providing financial protection for project owners.
Key Considerations for Retention Bonds
- Retention bonds must be backed by a reputable surety company to ensure credibility
- Owners should verify bond terms to ensure they align with contractual obligations
- Contractors should assess the cost of the bond versus the benefits of improved cash flow
Related Terms: Retainage, Performance Bond, Payment Bond, Defect Liability Period
FAQs
How does a retention bond differ from retainage?
A: Retainage involves withholding payments, while a Retention bond provides financial security without delaying contractor payments.
Who pays for the retention bond?
A: The contractor typically purchases the bond from a surety company, factoring it into project costs.