CSLB Contractor's Law & Business Practice Exam

What term is used for funds withheld to guarantee completion of a project and correction of defects?

1. Retention

2. Inspection Fee

3. Performance Bond

4. Down Payment

The correct answer is: Retention

The term used for funds withheld to guarantee completion of a project and the correction of defects is "retention." Retention is a common practice in construction contracts where a portion of the payment owed to the contractor is held back until the project is completed to the satisfaction of the project owner and any defects are addressed. This practice serves to ensure that the contractor has an incentive to complete the work correctly and to the standards required, as they will only receive the full payment once these conditions are met. In the context of construction, retention funds provide protection for the project owner against non-completion or poor workmanship. It helps ensure that any potential issues are resolved before the contractor receives their final payment. Other terms presented, such as inspection fee, performance bond, and down payment, refer to different concepts. An inspection fee relates to payments made for inspections during the construction process, a performance bond is a guarantee by a third party that the contractor will complete the project according to the contract, and a down payment is an initial payment made before work begins, which does not serve the purpose of ensuring project completion or defect correction. Thus, retention specifically aligns with the requirement to guarantee project completion and address defects.