Retention
Retention is a percentage of contract value withheld from a contractor's payments - typically 3% to 5% - as security against defective or incomplete work. It is released in two stages: at practical completion and at the end of the defects liability period.
Retention is a sum withheld from a contractor's payments under a construction contract, typically 3% to 5% of the contract value, as security against defective or incomplete work. The client - or, in sub-contract arrangements, the main contractor - holds the retained amount progressively across interim payments. Retention is not a penalty; it is a contractual mechanism that gives the paying party leverage to ensure the contractor returns to address any defects identified after handover. In the US, the equivalent term is retainage.
How Retention Is Released
Retention is released in two equal stages, tied to defined project milestones.
The first half is released upon certification of practical completion - when the works are substantially finished and the client takes possession. At this point, 50% of the total retention held becomes due to the contractor.
The second half is released at the end of the defects liability period (DLP) - typically six or twelve months after practical completion. During the DLP, the contractor must return and remedy any defects that emerge. Once the client certifies that defects have been made good, the remaining retention is released and the final account settled.
Sub-contractor retention stacking
Main contractors often apply the same retention terms to their sub-contractors as the client applies to them. This means retention can be withheld at two levels on the same project: the client holds retention from the main contractor, and the main contractor holds retention from sub-contractors. Both amounts need to be tracked and actively chased as separate receivables.
Retention as a Cash Flow Challenge for Contractors
Retention has a sustained impact on contractor cash flow. On a $500,000 contract at 5% retention, $25,000 is progressively withheld across interim payments and may not be fully recovered for 12 to 18 months after the project completes. Across a contractor's full order book, the total retention outstanding at any point can represent a significant tied-up cash balance - often tens of thousands of dollars that the business has earned but cannot yet collect.
Contractors who do not actively track retention frequently miss DLP end dates, leaving them to re-open negotiations with clients who have long since moved on. Setting a DLP end date reminder at practical completion, and treating retention as a separate receivable line in your financial records, prevents those losses from becoming permanent write-offs.
Frequently asked questions
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