Retention (Construction Contract)

Retention is a long-standing feature of construction contract payment mechanisms that allows the employer to hold back a proportion of money owed to the contractor as a performance bond in lieu of other security. It has been the subject of significant reform debate in the UK, where the Construction Act and subsequent reviews have focused on protecting subcontractors from retention monies being lost in main contractor insolvencies.

What is Retention (Construction Contract)?

Retention is a deduction, typically between 3% and 5% of the gross value of work certified in each interim valuation, that the contracting authority withholds from payments due to the contractor. Its purpose is to provide the employer with a financial incentive for the contractor to remedy defects and complete outstanding work.

The retention fund accumulates throughout the project. Under JCT contracts, it is released in two equal halves: 50% is released when the architect or contract administrator issues the Practical Completion Certificate (reducing the retention percentage to half its original rate), and the remaining 50% is released when the Final Certificate is issued, following satisfactory remedy of all defects notified during the defects liability period.

Under NEC contracts, retention is managed via the retention percentage set out in the contract data and the retention free amount below which no retention is held. NEC uses a different terminology (retention amount deducted, released at Completion and at the end of the Defects Correction Period) but the economic effect is broadly similar.

FIDIC contracts include a retention money provision in clause 14 of both Red and Yellow Books, with the retention percentage and limit stated in the Appendix to Tender.

A key policy concern in the UK has been that retention funds held by main contractors are unsecured. If a main contractor becomes insolvent, subcontractors may lose their retention entirely. The UK government has consulted repeatedly on introducing mandatory retention deposit schemes to protect these funds. Scotland introduced a prompt payment code and there is ongoing legislative pressure for England and Wales. Similar concerns exist in several EU member states, leading some to introduce escrow or ring-fencing requirements.

Why it matters for bidders

Retention directly affects contractor and subcontractor cash flow. A 5% retention on a GBP 10 million contract means GBP 500,000 is withheld for at least 12 months after practical completion, often longer if defects remain outstanding. Pricing bids must account for this financing cost. Subcontractors are especially exposed because retention flows through two tiers: the employer holds retention from the main contractor, who in turn holds retention from subcontractors.

Bidders should confirm the retention rate, the release mechanism, and any provisions for retention bonds as alternatives to cash retention before committing to a contract.

Example

A Belgian public hospital trust awards a EUR 8 million refurbishment contract with 3% retention. Interim payments are made monthly. At month 18, when practical completion is certified, EUR 120,000 (half the accumulated retention of EUR 240,000) is released. The remaining EUR 120,000 is released 12 months later when all notified defects have been remedied and the final account is agreed.

Frequently Asked Questions

Can a contractor replace cash retention with a retention bond?

Some contracts allow or require the contractor to provide a retention bond (a form of guarantee from a bank or insurer) in lieu of cash retention. This protects the employer without the cash flow impact on the contractor. Whether a bond is acceptable depends on the contract terms; it must be negotiated before contract execution.

What happens to retention if the contractor becomes insolvent?

If the contractor becomes insolvent before retention is released, the employer has a right to apply the retention against the cost of completing outstanding work or remedying defects. If the subcontractor becomes insolvent, the position is more complex and depends on the contract terms and the insolvency regime of the relevant country.

Is there a legal cap on retention rates in Europe?

The UK Construction Act does not cap retention rates, though industry guidance recommends 3% as a norm. Some EU member states have introduced statutory limits or prompt payment obligations that effectively limit retention practices. Bidders should verify the applicable national rules for contracts outside the UK.