Legal Definitions - retained fund

A retained fund refers to a portion of a payment that is deliberately withheld by one party (the payer) from another party (the payee) until specific conditions outlined in a contract are fully met. This practice is common across various industries, particularly in construction and large-scale projects, to ensure satisfactory performance, completion of work, or to cover potential future liabilities such as defects or warranty claims. Once the agreed-upon conditions are fulfilled, the retained fund is released to the payee.

Here are some examples illustrating the concept of a retained fund:

• Construction Project: Imagine a city government hiring a construction company to build a new public library. The contract specifies that 5% of each progress payment will be held back by the city until the entire building project passes final inspection, all necessary permits are secured, and a one-year warranty period for the construction has expired without major issues. This 5% held by the city constitutes a retained fund.

  Explanation: The city uses the retained fund as a financial incentive and safeguard. It ensures the construction company completes the project to the required standards, addresses any defects that arise during the warranty period, and fulfills all contractual obligations before receiving the full payment for their work.

• Software Development Agreement: A technology startup contracts with an external software development firm to create a complex mobile application. Their agreement stipulates that 10% of the final payment will be held in a retained fund until the application has been successfully launched on app stores, passes all user acceptance testing, and operates without critical bugs for 60 days post-launch.

  Explanation: The 10% withheld by the startup is a retained fund. It provides leverage to ensure the software development firm delivers a fully functional, stable, and market-ready application, guaranteeing that the startup receives a high-quality product that meets its operational requirements.

• Large Equipment Installation: A manufacturing plant purchases a new, highly specialized robotic assembly line from a machinery supplier. The purchase agreement includes a clause stating that 15% of the total cost will be held as a retained fund until the robotic line is fully installed, calibrated, passes a three-month performance test demonstrating specified production output, and all operational training for the plant's staff is completed.

  Explanation: The 15% held by the manufacturing plant is a retained fund. It ensures that the machinery supplier not only delivers and installs the equipment but also ensures it is fully operational, meets performance benchmarks, and that the plant's staff are adequately trained to use it, thereby minimizing post-installation issues and ensuring the plant's investment is sound.