Final answer:
Retainage is not a penalty but a portion of the contract price withheld until the work is substantially complete to ensure the contractor or subcontractor performs satisfactorily. It serves as security for the owner and is paid out when the work is satisfactorily completed, as defined in the contract.
Step-by-step explanation:
No, retainage is not a penalty amount kept by the owner. Retainage, also known as retention, is a portion of the agreed-upon contract price deliberately withheld until the work is substantially complete to ensure that the contractor or subcontractor satisfactorily completes the portions of the work that they are obligated to perform. The purpose of retainage is to provide the owner with security for the contractor's faithful performance of the contract and to protect against potential mechanics' liens. In practice, the retainage often equates to a small percentage of the total contract value—commonly 5-10%. Once the work has met the criteria defined in the contract for satisfactory completion, the retainage is paid out to the contractor or subcontractor.
It is crucial to differentiate between retainage and penalties because the latter can be imposed for late completion of the work or for failure to meet other contract terms, while retainage is instead a security measure. In contracts, penalties must be stated as such and are generally subjected to legal restrictions. Hence, retainage is not a penalty but a financial control measure.