Retention money is a fraction of payment for a service or product that is kept until some conditions are met. For example, when a company buys some equipment, retention money can be defined in contract as sum that will be paid only after the equipment is delivered and installed.
Retention money is used in contracts as an additional guarantee of service quality. For example, some fraction of payment is kept until the guarantee time (e.g. 5 years) will expire.
Retention money increase costs of suppliers, as they receive money later. That means that money is worth less due to changing value of money in time (see: discount rate). At the same time buyer keeps the money and can invest them and earn interest.
- Pfeifer, P. E. (2005). The optimal ratio of acquisition and retention costs. Journal of Targeting, Measurement and Analysis for Marketing, 13(2), 179-188.
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