What is Construction Retention?

Full Definition

Construction retention is a mechanism commonly used in UK building contracts under which the client (or main contractor, where a subcontractor is involved) withholds a percentage of each interim payment due to the contractor, typically 3% to 5% of the certified value of works completed, as security against the contractor failing to finish the works properly or failing to fix defects that emerge after completion. Rather than the client paying 100% of every valuation as the works progress, a retention fund builds up over the course of the contract, giving the client a financial incentive it can call on if the contractor becomes insolvent, abandons the site, or fails to return to remedy defects once challenged, since chasing a departed or insolvent contractor for the cost of remedial works after the event is often far harder than simply deducting the cost from money already held. Retention is typically released in two stages: half is usually paid on practical completion, once the works are certified as complete enough for the client to take possession and use the building for its intended purpose (even though minor defects, sometimes called "snagging" items, may remain to be fixed), and the remaining half is released at the end of the defects liability period, commonly six or twelve months after practical completion, once the contract administrator confirms that any defects notified during that period have been satisfactorily remedied. Standard form contracts published by bodies such as the Joint Contracts Tribunal (JCT) set out the retention percentage and release mechanics in detail, and the specific figures used on any given project depend on what was agreed and inserted into the contract particulars when the contract was signed. Retention has long been controversial in the UK construction industry, particularly among smaller subcontractors, because retention money is not normally held in a separate, ring-fenced trust account, meaning that if a main contractor higher up the supply chain becomes insolvent while holding retention monies due to subcontractors, those subcontractors often rank only as unsecured creditors for the retention owed to them and can lose it entirely -- a problem estimated to cost UK subcontractors hundreds of millions of pounds over the years through contractor insolvencies, and the subject of ongoing government consultation on whether retention should be abolished or replaced with a mandatory retention deposit scheme. Worked example: a contractor completes GBP 200,000 of certified works in an interim valuation; with a 5% retention rate, the client withholds GBP 10,000 and pays GBP 190,000, with GBP 5,000 of the withheld amount released on practical completion and the remaining GBP 5,000 released once the defects liability period ends and any snagging items have been fixed to the contract administrator's satisfaction.

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