Construction Financial Glossary

Retention Bond Definition

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

    1. Retention bonds must be backed by a reputable surety company to ensure credibility
    2. Owners should verify bond terms to ensure they align with contractual obligations
    3. 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.

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