Retention in construction contracts: how it works, what you can negotiate and how to get it released

Retention is the percentage of each payment that the client or main contractor holds back as security against defects, typically released half at practical completion and half at the end of the defects period. In theory it is a modest safeguard. In practice it is billions of pounds of subcontractors' money held across the industry at any one time, some of which is never seen again when the firm above goes bust.

The usual terms

Retention of 3% to 5% is deducted from each interim payment. Half is released at practical completion of the works (or the section you were responsible for), and the remainder at the end of the defects liability period, which is usually 6 or 12 months after completion. The release is supposed to follow the certificate, but in reality it follows an application that you make and chase.

On JCT main contracts retention is 3% (5% on older or amended forms). On subcontracts, main contractors routinely pass down whatever they are suffering plus a bit, and the release can be tied to the main contract's defects period rather than your own, which can mean two years.

What you can negotiate

• The percentage: ask for 3% rather than 5%, or a cap once the retained amount reaches a fixed sum
• Release dates: release tied to your own practical completion and your own defects period, not the main contract's
• A retention bond in place of cash retention, which costs a premium but keeps the cash in your business
• No retention at all on small packages or for firms with a track record; it is more common than you think
• A clear defects process so the second half is not held up by a snagging list that keeps growing

Whatever you agree, get it in the subcontract and check the payment schedule matches.

Price for it

Retention is a cost. Money held for 18 months has a financing cost, a risk cost and an admin cost. Many subcontractors add 1% to 2% to tenders where retention is 5%; others accept it as the price of the work but make sure the margin covers it. What you must not do is forget it: a 5% retention on a £200,000 package is £10,000 that will not appear in your bank account for over a year. EstiMate's job costing shows retention held per job so cash flow forecasts are honest.

Your rights under the Construction Act

The Housing Grants, Construction and Regeneration Act gives you the right to interim payments, to a payment notice and a pay-less notice before money is withheld, and to adjudication. Retention deducted without a compliant pay-less notice can be challenged. Release withheld after the contractual date is a debt. Note that the Act does not apply to contracts with a residential occupier, so on domestic work the protection comes from the contract you sign; the contracts EstiMate produces include payment and retention terms for exactly this reason.

Getting it released

• Diarise both release dates the day you sign the subcontract
• Apply for the first release with your practical completion application; attach the completion certificate or handover record
• Close out defects promptly and get written confirmation they are accepted
• Apply for the second release on the day the defects period ends, with a statement that no defects are outstanding
• If it is not paid within the contractual period, send a formal reminder quoting the clause, then a letter before action claiming statutory interest

Keep every application, certificate and email on the job record. When a release is disputed two years after you left site, the site diary, the handover pack and the photographs are what win it.

The future

The government has consulted repeatedly on abolishing or ring-fencing retention, and some clients and larger contractors have moved to retention-free or project bank account arrangements. Ask every time. The worst they can say is no.