What is Retention (Contractors)?

Retention in the context of contractors in the UK refers to a portion of the contract payment withheld by the client or main contractor until the project or a specific phase of the project is completed to a satisfactory standard. Here’s a detailed explanation tailored for a UK audience:


  1. Definition:
    • Retention: Retention is a financial arrangement in construction and other contract-based industries where a percentage of the payment due to a contractor or subcontractor is withheld by the client or main contractor as security against incomplete or defective work. This amount is typically released in two stages: upon completion of the work and after a defect liability period.
  2. Key Features:
    • Retention Percentage: Commonly, 5% to 10% of the contract value is retained. The exact percentage is specified in the contract terms.
    • Two-Stage Release: Retention is usually released in two stages:
      • Practical Completion: Half of the retained amount is released upon achieving practical completion, meaning the project is substantially complete and fit for use, even if minor defects remain.
      • Defects Liability Period: The remaining half is released at the end of the defects liability period (typically 6 to 12 months after practical completion), provided all defects have been rectified.
  3. Purpose:
    • Quality Assurance: Retention ensures that contractors complete the work to the required standard and within the agreed timeline.
    • Defect Rectification: It provides an incentive for contractors to return and rectify any defects or issues that arise during the defects liability period.
    • Financial Security: Acts as a form of financial security for the client or main contractor, safeguarding against non-performance or substandard work.
  4. Legal and Contractual Considerations:
    • Contract Terms: The terms of retention, including the percentage withheld, release conditions, and defects liability period, should be clearly defined in the contract.
    • Payment Timelines: The contract should specify the timelines for the release of retention funds to avoid disputes and ensure timely payment.
    • Construction Act Compliance: Retention practices must comply with the UK Construction Act 1996, which governs payment practices in the construction industry, including provisions for timely payment and dispute resolution.
  5. Benefits:
    • Quality Control: Helps ensure that work is completed to a high standard and encourages contractors to address any defects promptly.
    • Client Protection: Provides financial protection to the client or main contractor, reducing the risk of paying for incomplete or defective work.
    • Incentive for Contractors: Encourages contractors to complete the project on time and address any issues during the defects liability period to receive the withheld funds.
  6. Challenges:
    • Cash Flow Impact: Retention can impact the cash flow of contractors and subcontractors, especially smaller firms, as they have to wait for the release of the retained amounts.
    • Disputes: Disagreements may arise over the release of retention, particularly if there are disputes about the quality of work or the rectification of defects.
    • Administrative Burden: Managing retention payments adds an administrative layer to the contract management process.
  7. Example:
    • A construction company is contracted to build a commercial property for £1,000,000. The contract includes a 5% retention clause. Throughout the project, 5% of each payment milestone is withheld, amounting to a total retention of £50,000. Upon practical completion, £25,000 is released. The remaining £25,000 is held until the end of a 12-month defects liability period and is released once all identified defects are rectified.
  8. Best Practices:
    • Clear Documentation: Ensure that the terms and conditions of retention are clearly documented in the contract.
    • Regular Reviews: Regularly review the project’s progress and quality to address any issues promptly and facilitate the timely release of retention funds.
    • Dispute Resolution Mechanisms: Include clear mechanisms for dispute resolution in the contract to handle any disagreements over retention.

In summary, retention in the context of contractors in the UK is a practice where a portion of the contract payment is withheld to ensure project completion and quality. It serves as a safeguard for clients and main contractors but requires careful management to balance the financial impact on contractors and ensure timely resolution of defects and payment.