Retentions And Other Forms Of Security

1. What Are Retentions

Retention monies are, in theory, money earned that is held back by the client to insure against contractors’ failure. The purpose of the retention is to ensure that the contractor properly completes the activities required of them under the contract. The retention monies are deducted from payments made to the supplier. The retentions are then released to the supplier in two stages during the project cycle:

The first half of the amount retained is released on certification of practical completion and the remainder should be released upon the certification of the making good of defects so called ‘final statement’ in design and build contracts such as JCT.

Interim certificates should specify the amount of retention held back at each interim payment and a statement should be prepared showing retention owed for sub-contractors.

In construction management contracts, a separate certificate of practical completion must be issued for each trade contract and so there are number of defects liability periods. This means that retention must be released as required for each individual trade contract. The same applies to management contracts where it must be certified individually.

2. Complications

Retention can be a large amount of money and may cause cash flow problems for suppliers. Employers and head contractors rarely release retentions on time or in accordance with the contract. In a situation where the money is withheld long enough, the subcontractor often stops trying to collect the retention money and it becomes a de facto secondary discount. On a macro level, those retention monies end up as a further discount and source of profit to the paying party instead of to the sub-contractor, even if the reason for failure isn’t related to that sub-contractor.

Unfortunately, the reality is often that the contracts that include retentions do not link the deduction of the retention monies to the identification and resolution of defects other than by coincidentally identifying the release date for the second half of retentions as being the expiry of the defects liability period under the main contract – known as ‘pay-when-certified’. Instead, they rely on the right in general law of the paying party to set-off any losses incurred as a result of non-performance by the supplier from monies owed by the paying party to the supplier, i.e. the retention monies.

Ordinarily, if the paying party alleged non-performance by the supplier it would have to prove its case before being able to recover any resulting loss. The inherent risk is that the paying party has an ability to decide subjectively whether it is entitled to claim against them in relation to alleged losses it has incurred or release them.

The most common problems sub-contractors face include:

• The amount of retentions is disproportionate to the costs of recovery
• Weaker cash flow
• Administrative problems
• Increased risk of non-payment due to contractor insolvency

3. Changes In Retention Law

Amendments to the Housing Grants, Construction and Regeneration Act 1996, effective from 1 October 2011, made it unlawful for the release of subcontractor retentions to be conditional on events unrelated to the subcontract. This effectively banned "pay-when-certified" clauses, reinforcing the principle that subcontractors must be paid based on their own performance and entitlements.

Although there has been significant industry pressure to reform the retention system—particularly to protect the supply chain from upstream insolvency—the UK Government has not enacted any legislation mandating a statutory retention deposit scheme. The Construction (Retention Deposit Schemes) Bill, introduced as a Private Member’s Bill, has lapsed without becoming law.

As of 2025, no legislative reforms have been implemented, but the topic remains under periodic industry and political review.

4. Handling Retention Under Different Contract Forms

The treatment of retentions varies depending on the standard form of contract used and whether amendments are introduced by the contracting parties. While some forms (like JCT) include detailed default provisions for retention, others (like NEC) require it to be added as an optional clause. Understanding how retention operates under these frameworks — and how it is often amended in practice — is critical for contractors and subcontractors managing payment risk.

JCT Contracts

JCT subcontracts were amended to reflect the changes that came into effect with the Construction Act.

Main contractors often amend these amounts and dates to better suit their own purposes. For example, the 3% is almost always raised to 5% (and can in some cases be as high as 10%), and stage 1 of retention date is amended to lengthen the time the contractor can hold the monies.

NEC3 & NEC4 Contracts

Retention is not included as a core provision in NEC3 or NEC4 contracts. If retention is to be applied, it must be expressly incorporated through Secondary Option X16. Under X16, retention monies are withheld from payments and are released upon the issue of the Defects Certificate, which marks the conclusion of the defects correction period.

5. Are There Any Alternatives To Retention?

There are a number of recognised alternatives to conventional cash retention, aimed at balancing the client’s need for performance security with the contractor’s cash flow. However, these mechanisms are not always adopted as standard and, in some cases, may be used in addition to retentions — rather than as a true replacement.

(Note: For more detailed guidance on Performance Bonds and Parent Company Guarantees (PCGs), please refer to our separate dedicated factsheets).

Parent Company Guarantee (PCG):

A PCG allows the client to secure performance from the contractor’s parent or affiliated company. It typically requires the client to prove that the contractor has breached its obligations, and that a loss has resulted, before any enforcement can occur.

Performance Bond:

A performance bond is a third-party financial guarantee — typically issued by a bank or insurer — that secures the contractor’s obligations under the contract. Most UK bonds are conditional (i.e., default bonds), meaning the client must demonstrate breach and quantify their loss to recover. Some contracts, particularly international or high-risk ones, may use on-demand bonds, which permit payment without the need to prove breach.

Retention Bond:

A retention bond serves as a formal agreement between the contractor, the subcontractor, and a third party serving as guarantor (usually a bank). The guarantor’s role and obligations will depend upon the terms of the bond (see below), but in well-worded bonds the recipient must prove the contractor has failed to perform and prove the loss resulted from that failure and was reasonable, in order to recover that loss.

In England and Wales, the retention bond amount reflects the amount that would have been held back as retention money throughout the project. At the point of practical completion, the bond is reduced to reflect only the amount that would be retained during the defect liability period. In situations where the sub-contractor fails to correct any defects in the work, the guarantor pays the contractor the amount required to correct any defects and then pursues the sub-contractor for that amount. Thus, the main contractor is still covered should something go wrong, while the sub-contractor gets to hold onto their money, improving cash flow and eliminating the threat of non-payment.

Trust Account:

The retention money can be put into a trust account with a separate entity, which protects the contractor from risk by allowing the cash to flow to an impartial and independent agent. By using this option, the retention money is still withheld, the sub-contractor is assured of payment in accordance with the contract. The trust account option is getting mixed responses from industry professionals and the government.

6. Summary

There is no “one size fits all” solution to security on a project. Every project is different and the requirements of each contractor’s and sub-contractor’s businesses are different. Many factors will come into play when deciding what form of security is best, including the parties’ cash flow, cost of obtaining security, and each company’s structure and resources.

Parties should not automatically opt for one form of security over another as a default position. Security should be carefully considered on a project-by-project and party-by-party basis to ensure the most suitable solution is reached for all parties.

Please note: this factsheet was last updated in June 2025, is aimed for general information purposes only and does not constitute legal or other professional advice. The information is considered to be correct at the date of publication however any changes and further developments may impact the accuracy and validity of the information provided here. For further advice or assistance with a contract review please contact Legal & Commercial team on legal@thebesa.com.