CSLB Law & Business ExamBusiness FinancesHard
A contractor completes a $200,000 job under a contract that withholds 10% retention until final completion, to be paid 60 days after substantial completion. How much cash does the contractor have tied up in retention during that 60-day period?
- A$15,000
- B$30,000
- C$10,000
- D$20,000
Show answer & explanationAnswer & explanation
Correct answer: D. $20,000
Retention withheld equals 10% of the $200,000 contract value = $20,000. This amount is unavailable to the contractor as cash flow until the retention is released 60 days after substantial completion, even though related costs may already be paid.
Why the other options are wrong
- A. Does not match 10% of $200,000.
- B. Overstates the retention amount; this would be 15% of the contract.
- C. This is 5% of the contract, not the stated 10% retention.
Contract Retention and Cash Flow
Retention is a percentage of contract payments withheld by the owner until project completion, creating a cash flow gap for contractors who must cover costs before receiving the withheld funds.
- Common retention rates: 5-10% of contract value
- Retention delays cash receipt despite costs being paid earlier
- Must be factored into cash flow planning and financing needs
Memory trick: Retention is cash held hostage until the job is truly done.