Retention money is a sum of money held by the employer as a safeguard for any defective or non-conforming work by the contractor. It is a provision that safeguards the employer against defects that can occur during the defects liability period if the contractor doesn’t respond according to the contract terms. The purpose of retention money is to provide security, in the form of a source of funds, against the contractors failure to complete any work outstanding when the works are taken over and to remedy any defects or damage and in respect of any other liability of the contractor to the employer. In general, retention money provides protection to the employer and gives the idea of the importance of completing the signed project as per its terms and designs.

An example of retention money in practice would be a construction project where a contractor is hired to build a new office building for a client. The client agrees to pay the contractor a total of $10 million for the work, but agrees to hold back 5% ($500,000) of the contract value as retention money. Once the contractor has made the necessary repairs and the client is satisfied that the building meets the required standards, the retention money is released.

Retention money is an important concept in cost accounting, particularly in contract costing. It is a way to ensure that the contractor completes the work as per the contract terms and designs and provides protection to the employer against any defects or damage.