What is Retention in Construction?

March 5, 2024

Retention in construction is a mechanism in which money is paid out at regular intervals throughout a project, typically linked to work quality and delivery timelines. Contracts stipulate a percentage of the contract price that may be withheld, and the terms under which it must be released (such as upon certification of practical completion or ‘substantial completion’ for Institution of Civil Engineers contracts). This practice is commonplace across the construction sector and is widely regulated in states and countries around the world, and aims to provide an incentive for contractors to complete their works within budget and provide protection against poor performance by suppliers and subcontractors.

However, this seemingly innocuous payment mechanism can cause significant problems in practice. In particular, it can place cash flow pressure on contractors, especially those at the bottom of the supply chain where it can account for all or part of their profit margins. In addition, unscrupulous clients and contractors have been known to weaponize retainage, threatening to withhold or delay payments or require additional work that is out of scope.

The good news is that effective communication strategies can help to minimise retention issues. The key is to be transparent about how much is being retained and when it is being released. For example, head contractors should notify the date of practical completion and defects liability periods and ensure that their invoices make this clear. In addition, the procuring contractor should have automated systems in place to track when their subcontractors’ parts of the project are ready for release of their retention.

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