What is Retention in Construction?

Retention is a common practice in the construction industry where a percentage of payment is withheld from a contractor or subcontractor until the project is completed.

This article explains what retention is, how it works, and why it’s used in construction contracts.

Table of Contents

What is Retention in Construction?

Retention is a percentage of payment (typically 5-10% of the contract value) that is withheld by the client until the end of a construction project.

It serves as security against potential defects and motivates the contractor to properly complete the work.

Retention provides the client assurance that any issues will be fixed before full payment is made.

Key Points

Retention is a percentage of each payment withheld until project completion
The typical retention amount is 5-10% of the total contract value
The purpose is to ensure the contractor fixes defects and completes all work

Our Opinion

Retention is a crucial protection for clients in construction projects.

Withholding a portion of payment provides leverage to get any outstanding work or issues resolved before the contractor receives their full fee.

We believe retention helps ensure projects meet the required standards.

What Is Retention in Construction?

Retention refers to a percentage of the total contract sum that is deducted from each payment made to the contractor or subcontractor throughout a construction project. Typically, 5-10% of each payment is held back as retention.

The purpose of retention is to ensure that the contractor fulfils their obligations and completes the work to a satisfactory standard. It provides the client with a form of security or guarantee against any defects or unfinished work that may arise.

Retention acts as a safeguard for the employer. If the contractor fails to rectify defects, the client can use the retained funds to hire someone else to fix the work. It encourages the contractor to meet milestones, fix any issues, and finish the project properly.

The retained amount is gradually released back to the contractor throughout the project. Normally, half is released upon practical completion, and the remainder after the liability period when any defects have been fixed.

Retention gives reassurance to the client while motivating the contractor to complete the work on time and to a high standard. For the contractor, it ensures they will eventually receive full payment upon satisfactory completion of the project.

In summary, retention in construction contracts is the practice of withholding a percentage of payment from contractors until the end of the project to cover potential defects and unfinished work.

How Does Retention Work in Construction Projects?

There are a few key steps involved in implementing retention on a construction project:

The retention percentage, typically 5-10%, is agreed upon in the contract and specified in the payment schedule.
When the contractor submits a payment application, the retention amount is deducted before payment is made.
The retained funds are held in a separate account by the client.
Upon reaching certain milestones, a portion of the retention may be released back to the contractor. For example, half upon practical completion.
At the end of the project, once any defects have been rectified, the remainder of the retention is released back to the contractor.
The contractor must fix any defects identified during the liability period to receive the final retention payment.

There may also be separate retention amounts specified for subcontractors. The main contractor may impose retention on payments to subcontractors, which is then released back according to similar milestones and defect rectification terms.

Retention terms, amounts, and release schedules must be specified in contracts to avoid disputes. With clear agreement upfront, retention can work smoothly to protect both the client’s and contractor’s interests in a construction project.

What Is the Purpose of Retention Money?

Retention serves several important purposes in construction projects:

It provides the client with security against the contractor failing to properly complete the work or rectify defects. The retention acts as a financial incentive for the contractor to fulfil all their obligations.
Retention allows the client to hold back payment until they are fully satisfied with the finished product. This protects against paying in full upfront for unsatisfactory or incomplete work.
The portion of retention released at milestones encourages the contractor to progress on schedule and meet interim targets.
Retention also provides the client with a source of funds to rectify defects if the contractor fails to do so during the liability period.
For the contractor, retention encourages subcontractors to properly complete their work and fix any defects before the end of the project.

Overall, retention provides important leverage to help ensure construction projects are delivered on time, within budget and to the expected quality standards. By agreeing upfront to the retention terms, both parties are protected if things don’t go entirely to plan.

What Is the Typical Retention Percentage?

There is no fixed rule on what percentage of each payment should be retained. However, there are some commonly used guidelines:

A retention percentage of 3-5% of overall project value is typical for main contractors.
For subcontract packages, a higher retention of 5-10% is often applied to provide greater security for the main contractor.
On public sector construction projects, retention levels are sometimes set at 5% by contract.
Retention may be higher on certain high-risk or complex projects, potentially up to 10% or more.
The percentage should be reasonable based on the nature of the work and the risks involved.

Half of the retention amount is often released at practical completion, with the remainder released at the end of the defects liability period. This encourages the contractor to properly fix any defects before the final payment.

While there are no universal standards, retention percentages in the 3-10% range are commonly applied in the construction industry.

When Is Retention Released in Construction?

Retention is not normally released to the contractor until certain milestones are reached:

Typically half the retention amount is released upon practical completion of the works. This involves finishing the substantive works set out in the contract.
The remaining retention amount is usually released at the end of the defects liability period. This provides time to identify and rectify any defects in the works before final payment.
The defects liability period often lasts around 12 months from practical completion but can vary depending on the contract.
Some contracts may allow for partial early release of retention as certain sections of work are completed before overall practical completion.

The withholding and release of retention incentivise the contractor to complete the works and fix any defects that arise properly. It can be a key tool to manage risk in construction projects.

In summary, retention is normally released in two stages – halfway at practical completion, and the remainder at the end of the defects liability period after any defects have been fixed.

FAQ

What does retention mean in contracting?

Retention refers to a percentage of each payment that is withheld or retained by the client until the end of the project. It serves as a form of security against potential defects or incomplete work.

What is the purpose of retention?

The purpose of retention is to ensure the contractor completes the work properly and fixes any defects. It motivates the contractor to rectify problems before the end of the project.

What is an example of retention in construction?

A common retention amount is 5-10% of each payment. For example, if the contract value is $100,000 and retention is 10%, the client will withhold $10,000 throughout the project, to be paid at completion.

Why is retention important in construction?

Retention is important to protect the client’s interests. It provides financial leverage to get incomplete or defective work fixed before the contractor receives full payment.

Conclusion

Retention refers to the percentage of payment withheld by a client until the end of a construction project. It is usually 5-10% of the contract value. The purpose of retention is to ensure the contractor completes the work properly and rectifies any defects. It provides the client with assurance that the job will be finished to the required standard before releasing full payment. Overall, retention is an important protection mechanism in construction contracts.