Retention in Construction Contracts: How It Works in the UK

Retention is one of the most frustrating aspects of construction contracts for subcontractors and small builders. You complete the work, invoice for it, and then discover that 5% is being withheld for months or even years. It is a practice that has been part of UK construction for decades, and while there are growing calls to reform or abolish it, retention remains standard in most contracts today. This guide explains how retention works, what your rights are, and how to manage it properly.

What Is Retention?

Retention (sometimes called "retentions" or "retention money") is a percentage of each payment that the client or main contractor withholds from the contractor or subcontractor. The purpose is to provide financial security in case defects are found in the completed work.

Think of it as a deposit held against the quality of your work. If defects appear during the defects liability period (usually 12 months after practical completion), the party holding the retention can use that money to pay for remedial work if you do not come back to fix the issues yourself.

Retention applies throughout the supply chain. The client holds retention from the main contractor, and the main contractor holds retention from subcontractors. On a large project with multiple tiers of subcontracting, retention can cascade down through several levels.

How Retention Works in Practice

Here is a typical example. You are a subcontractor on a project worth £100,000 to you. The contract includes 5% retention. Every time you submit an application for payment, 5% is deducted before payment is made.

• You submit a valuation for £20,000 of work completed
• The main contractor deducts 5% retention = £1,000
• You receive £19,000 (before any other deductions)

By the time you have completed your £100,000 package, £5,000 is being held as retention. That £5,000 is split into two halves:

• First half (£2,500) - released when practical completion of the whole project is certified
• Second half (£2,500) - released at the end of the defects liability period, typically 12 months after practical completion

The problem for subcontractors is that practical completion of the whole project may be months after you finished your own work. And the defects period adds another 12 months on top. You could be waiting 18 months or more after finishing your work before you see the full retention released.

Typical Retention Percentages

The most common retention percentages in UK construction are:

• 5% - the standard rate in most JCT and NEC contracts
• 3% - sometimes used on larger contracts or where the contractor has a strong track record
• 0% - some contracts (particularly on repeat work or where the contractor negotiates it out)

Under JCT contracts, the default retention percentage is 5% unless the parties agree otherwise. Under NEC4, retention is optional and only applies if included in the contract data.

It is always worth asking about retention before you sign a contract. Some clients and main contractors are open to reducing it, particularly if you can demonstrate a strong track record of defect-free work.

When Retention Gets Released

Retention is released in two stages under most standard contracts:

First Half - At Practical Completion

When the project reaches practical completion (the point at which the building is fit for its intended purpose, even if minor defects remain), the first half of retention becomes due. The contract administrator or project manager certifies practical completion, and the first moiety of retention should appear in the next interim payment.

Second Half - End of Defects Period

The second half is released after the defects liability period (also called the rectification period) expires. This is typically 12 months after practical completion. The contract administrator issues a certificate of making good (under JCT) or the defects certificate (under NEC), and the remaining retention becomes due.

In practice, actually getting retention released on time is a common frustration. Main contractors often delay releasing retention to subcontractors even after receiving their own retention from the client. This is a breach of contract but happens frequently.

Common Problems with Retention

Retention causes significant problems across the UK construction industry. Here are the most common issues:

Late Release

The most frequent complaint. Retention that should be released at practical completion or at the end of the defects period is simply not paid on time. Sometimes it takes months of chasing. Sometimes it never gets paid at all.

Main Contractor Insolvency

This is the biggest risk. If the main contractor goes into administration or liquidation, any retention they were holding from subcontractors becomes an unsecured debt. In an insolvency, unsecured creditors are last in the queue and typically recover only a small fraction of what they are owed, if anything.

The Build UK industry body estimated that the UK construction industry holds approximately £780 million in retention at any one time. When companies fail, significant amounts of that money are lost permanently.

Cash Flow Impact

For small builders and subcontractors, 5% of every payment being withheld has a real impact on cash flow. On a £200,000 contract, that is £10,000 tied up for over a year. For a small business operating on tight margins, that can be the difference between staying solvent and struggling to pay wages.

Unjustified Withholding

Some clients or main contractors use retention as leverage, withholding it even when there are no genuine defects. This can happen when there are commercial disputes on the project or when the paying party is experiencing their own cash flow difficulties.

How to Protect Yourself

While retention is difficult to avoid entirely, there are steps you can take to protect your interests:

1. Read the contract carefully before signing. Understand the retention percentage, when it is released, and what conditions trigger release. If the terms are unreasonable, negotiate.
2. Keep detailed records. Document the completion of your work, including dates, photographs, and sign-off from the supervising officer. If there is ever a dispute about whether your work was completed properly, your records are your defence. Tools like FORGE Command let you capture and timestamp evidence from your phone.
3. Submit a formal request for retention release. Do not just assume it will appear. When practical completion is achieved, write to the main contractor requesting release of the first half. Do the same at the end of the defects period for the second half.
4. Know your legal rights. Under the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act), you have the right to refer payment disputes to adjudication. This is a relatively quick and inexpensive process that can resolve retention disputes within 28 days.
5. Chase retention proactively. Do not let retention slip. Put diary reminders in your calendar for when each half should be released and follow up immediately if payment does not arrive.
6. Consider credit checks. Before entering into a contract where significant retention will be held, check the financial health of the company that will be holding your money. If they are at risk of insolvency, your retention is at risk too.

Alternatives to Cash Retention

There is growing pressure to move away from cash retention. Several alternatives exist:

Retention Bonds

A retention bond is a guarantee from a bank or insurance company that pays out if the contractor fails to remedy defects. The contractor pays a premium for the bond, but the client has the same financial security without holding cash. The advantage for the contractor is that the money stays in their bank account, improving cash flow.

Retention Trust Accounts

Instead of the paying party holding retention in their general account, the money is held in a separate trust account. If the paying party becomes insolvent, the retention money in the trust account is protected from creditors. This was recommended by the Pye Tait research commissioned by the UK government in 2017.

Project Bank Accounts

Project bank accounts (PBAs) hold all project money, including retention, in a ring-fenced account. Payments are made directly to all parties from the PBA. The UK government mandated the use of PBAs on public sector construction projects over £5 million, and they are increasingly used in the private sector.

Zero Retention

Some progressive clients and contractors have moved to zero retention, relying instead on proper quality management, regular inspections, and contractual obligations to remedy defects. This approach requires a high level of trust and robust contract administration.

Good documentation protects both sides. If you can demonstrate a clean record of quality work and prompt defect resolution, you are in a stronger position to negotiate lower retention or alternative arrangements on future contracts.

Frequently Asked Questions

What is the standard retention percentage in UK construction?

The standard retention percentage in UK construction contracts is 5% of the contract value (sometimes 3% on larger contracts). Half of the retention is typically released at practical completion, and the remaining half is released at the end of the defects liability period, which is usually 12 months after practical completion.

Can I refuse to agree to retention in a contract?

You can negotiate. There is no legal requirement for retention to be included in a construction contract. Some contractors and subcontractors successfully negotiate zero retention, a reduced percentage, or alternative arrangements such as retention bonds. Your bargaining position will depend on market conditions and the relationship with the client.

What happens to retention money if the main contractor goes bust?

This is one of the biggest risks with cash retention. If the main contractor becomes insolvent, retention money held by them is usually treated as an unsecured debt. Subcontractors are unlikely to recover the full amount and may receive only a fraction through the insolvency process, if anything at all. A retention bond or trust account can protect against this risk.

Is there a time limit for claiming retention money?

Under the Limitation Act 1980, you generally have six years from when the retention became due to make a claim for it. However, you should not wait that long. If retention is not released when it should be, raise it in writing immediately and follow up formally. If needed, you can use the adjudication process under the Housing Grants, Construction and Regeneration Act 1996 to resolve disputes quickly.

Final Thoughts

Retention is an imperfect system, but until the industry moves to better alternatives, it is something every builder and subcontractor needs to understand and manage. Know your contract terms, keep excellent records of your work, chase retention release dates proactively, and never assume the money will just appear.

The builders who manage retention best are the ones who document everything, understand their legal rights, and treat retention as a project management issue rather than something to worry about later.