Retention in Construction Contracts — What It Is and How to Manage It

Target keyword: retention construction contract homeowner Published by: RCB Design & Build | A2Z Principal Contractors Audience: Homeowners about to sign a building contract for an extension or loft conversion

When you sign a building contract for a loft conversion, extension, or refurbishment, you may encounter the concept of retention. It appears in some contracts as a standard clause, in others not at all — and many homeowners sign without fully understanding what it means, when the money is released, and what happens if things go wrong.

This article explains retention in plain terms: what it is, how it works under standard contracts, and what practical steps you should take as a client before signing.

What Retention Is

Retention is a percentage of the total contract value that the client withholds from the contractor across the duration of the project. It is not a penalty, and it does not mean the contractor has done anything wrong. Its purpose is to give the client a financial hold over the contractor — an incentive to return and fix any defects that emerge after the work is nominally complete, and a security against the contractor abandoning the project before it is finished.

In a typical construction retention arrangement, the client deducts the retention percentage from each stage payment or interim payment as it falls due. The retained sum accumulates and is then released in two tranches: the first at practical completion (when the project is substantially finished and the client takes possession), and the second at the end of the defects liability period (DLP).

Typical Retention Rates

For domestic residential projects, retention is commonly set at five per cent of each certified or agreed payment, falling to two and a half per cent at practical completion, with the remaining half released at the end of the DLP.

Under the JCT Minor Works Building Contract 2016 (MW 2016) — one of the most commonly used forms for domestic extensions and loft conversions — clause 4.14 governs retention. The standard JCT retention percentage is three per cent for contracts up to £500,000, but this can be varied by agreement. In practice, five per cent is common for smaller domestic works. The MW 2016 provides that at practical completion, the employer releases half the retention, and upon making good defects the remainder is released.

What Retention Protects

From the client's perspective, retention is the practical mechanism for ensuring the contractor returns to address defects identified during the DLP. If a contractor fails to return, the client can use the withheld sum to appoint another contractor to carry out remedial work.

From the contractor's perspective, it is important to understand that under JCT contracts, the retained sum is not the client's money to keep — it is held in trust for the contractor (established in Rayack Construction v Lampeter Meat Co [1979]). The contractor is entitled to payment of the retention upon satisfying the contractual conditions, and cannot be prevented from receiving it on grounds unrelated to those conditions. However, in informal domestic contracts that do not incorporate JCT terms, this trust protection may not exist.

JCT Homeowner Contracts

The JCT publishes specific consumer-facing contracts designed for use where a homeowner is engaging a contractor directly without a professional contract administrator. The JCT Homeowner Contract — Building Works (HO/B) includes stage payment provisions and a retention mechanism under Section 4. These are simplified compared to the full JCT MW but retain the core principle of deferred final payment linked to defects liability.

Contracts Without Retention

Many builders operating in the domestic market use bespoke written agreements or simple letter-form contracts that do not include a formal retention mechanism. This does not necessarily disadvantage the client, provided the contract is clear about the milestone structure. A final payment due only after the client has signed off the snagging list can achieve a similar outcome in practice — the contractor is not fully paid until defects are acknowledged and corrected. What matters is that the arrangement is explicit in the contract, not assumed.

What to Check Before Signing

Before signing any contract containing retention, you should confirm: the specific retention percentage; what each stage payment covers; at what point practical completion is defined and by whom; the length of the DLP (six months is typical for smaller residential projects; twelve months is common in commercial contracts and sometimes used for larger domestic works); and what process applies if defects are not remedied within the DLP.

It is also worth noting the UK construction industry's long-running debate about retention reform. Research commissioned by the government (including the Pye Tait 2017 study) found approximately £10 billion of retention outstanding in UK construction at any point in time, with significant numbers of businesses — many of them small contractors — failing to recover funds they are lawfully owed. Government has consulted on mandatory retention deposit schemes (escrow accounts) to protect these funds, but as of mid-2026 this has not been enacted for residential contracts.

How RCB Approaches Retention

RCB Design & Build issues a formal contract at project commencement, with payment stage milestones, a defined defects liability commitment, and a clear completion and sign-off process. We explain our retention and completion arrangements before any agreement is signed.