The term “holdback” in construction refers to a percentage of the contract price that is retained by the payer (typically the owner or the general contractor) until the construction project reaches certain milestones or is completed. The purpose of a holdback is to ensure that the contractor completes the work satisfactorily and fulfills all contractual obligations.
There are two main types of holdbacks in construction: the basic holdback and the finishing holdback.
- Basic Holdback:
- The basic holdback is the first phase of the holdback process.
- It typically amounts to 10% of the total contract price.
- The basic holdback is retained until the project is substantially performed, which means that the construction work is completed to a degree that the owner can use the structure for its intended purpose.
- Finishing Holdback:
- Once the project reaches substantial performance, the basic holdback is released, but a finishing holdback may be established.
- The finishing holdback is generally 10% of the value of the remaining work to be completed, such as finishing touches, deficiencies, or outstanding items.
- The finishing holdback is released once all remaining work is finished and the owner is satisfied that the contract has been fully completed.