Contract Retention in Building Contracts: How It Works

**The purpose of retention**: Retention is not a discount, not a bonus withheld for good performance, and not a negotiating tool. It is a financial security mechanism — a sum withheld from the contractor's earned income as insurance against defects that the contractor has agreed to remedy during the defects liability period.

• The retention concept assumes:
• •Building work may have minor defects that are not apparent at practical completion
• •The contractor has an obligation to return to site and remedy any defects identified during the defects liability period (typically 6–12 months)
• •The client needs some financial leverage to ensure the contractor honours this obligation
• •The retained sum is the contractor's money — it has been earned by completing the work — but is held by the client until the contractor's defects obligations are fulfilled

**How retention typically operates in residential construction**:

*Retention percentage*: For residential work, retention is typically 3–5% of the contract sum. Commercial construction often uses higher retention percentages (5–10%) but for domestic projects, 3–5% is the standard range.

*Application to interim payments*: If the contract provides for stage payments or valuations, retention is deducted from each stage payment at the agreed percentage until the total retention (typically the full retention percentage applied to the full contract sum) is held. For a £100,000 contract with 5% retention: maximum retention = £5,000; deducted at 5% from each interim payment until £5,000 is held.

*Release of retention — two halves*: Under the standard JCT Minor Works Building Contract (the most widely used form for domestic projects), retention is released in two tranches:

1. *First half at practical completion*: When the works reach practical completion (the stage at which the contractor has done everything they are required to do under the contract, save for any minor snagging items) — 50% of the total retention is released. For a £100,000 contract with £5,000 retention: £2,500 is released at practical completion.

2. *Second half at the end of the defects liability period*: The remaining 50% of retention is released when the defects liability period expires AND the contractor has remedied all defects notified during that period. For the same example: £2,500 is released at the end of the defects liability period (typically 6 or 12 months after practical completion) once any notified defects have been remedied.

**The defects liability period**: The defects liability period (DLP) is the contractual period during which the contractor has an obligation to return to site and remedy any defects that arise in the works — at their own cost. Under a JCT Minor Works contract, the standard DLP is 6 months. Some contracts specify 12 months — 12 months is generally preferable for larger projects as it allows a full heating season to reveal any defects in the heating and plumbing systems.

*What constitutes a defect in the DLP*: A defect is a failure of the works to comply with the contract — a leaking flat roof, a door that does not close properly, a paint finish that is blistering, a tile that has come away from the wall. A defect is not fair wear and tear, accidental damage by the client, or a change of requirement by the client after practical completion.

*The defects notification process*: The client (or their contract administrator) should prepare a written defects schedule and serve it on the contractor during the DLP. The contractor then has a reasonable period (typically 14–28 days) to rectify all notified defects before the second half of retention is released.

**Not all domestic building contracts include formal retention**: For smaller domestic projects (under £30,000–£50,000), many builders object to retention or prefer a simple stage payment structure without formal retention. In this case, the security mechanism is the final payment — the last stage payment is large enough relative to the work remaining at that stage that the client retains financial leverage through the final payment rather than through a formal retention deduction.

**Using retention fairly — the client's obligations**:

Retention is a contractual right — it is not an opportunity to withhold money beyond the agreed release dates.

*Release at practical completion*: The first half of retention must be released promptly when the works reach practical completion. Holding retention beyond practical completion to use as a negotiating tool for discounts, defect remediation, or scope additions is a breach of contract. The contractor has a right to prompt payment of certified amounts under the Housing Grants, Construction and Regeneration Act 1996 (for contracts meeting the Act's definition).

*Release at the end of the DLP*: The second half must be released promptly when the DLP expires and all notified defects have been remedied. If defects remain unremedied at the end of the DLP, the client should obtain a contractor quote (or engage a third-party contractor) to remedy the defects, deduct the reasonable cost from the retention, and release the balance. The client cannot hold retention indefinitely because of unresolved defects — the correct remedy is to quantify the unremedied defects, deduct the cost, and release the balance.

*Retention is earned money — not a performance bonus*: Some clients treat retention as a bonus that can be kept if the project goes over programme or if there are any disagreements. This is wrong — the retention is the contractor's earned income, held as security. Unless the contractor has failed to remedy defects, the full retention must be released at the appropriate dates.

**The contractor's perspective — protecting retention funds**: Retention held by the client but not yet released is at risk if the client becomes insolvent during the project. This risk is particularly relevant for large-value projects where the 5% retention on a £500,000 contract is £25,000. Industry campaigns (including the proposed reform of retention in the Construction Industry Retention Deposit Scheme Bill) have sought to require clients to hold retention in a dedicated trust account. Currently, for domestic projects, the protection available to contractors is limited — a well-drafted contract provision about retention release is the primary protection.

**Retention on materials off-site**: In larger commercial projects, it is common for retention not to be deducted on materials stored off-site (materials in the contractor's warehouse or at a fabricator that have been paid for but not yet delivered). This protects the client against paying for materials that the contractor may not deliver. For domestic projects, this level of sophistication in the retention provisions is unusual — payment is normally made only for materials on-site or incorporated into the works.

**Contractor refuses to return for defects**: If the contractor does not respond to a notified defects schedule within the agreed timescale, and refuses to return to site to remedy defects:

1. Send a formal written notice (letter or email) confirming the defects, the contractual obligation to remedy them, and the timescale for compliance. State clearly that if defects are not remedied by [date], the client will engage a third-party contractor and deduct the cost from the outstanding retention.

2. If still no response: obtain 2–3 quotes from alternative contractors to remedy the specific defects. Engage the cheapest reasonable quote, allow the work to complete, and then:

3. Release the retention minus the actual cost of the third-party remediation. Provide the contractor with the third-party invoices as evidence of the cost deducted.

4. If the contractor disputes the deduction, the dispute resolution mechanism in the contract applies — typically adjudication (under the 1996 Act for contracts that fall within its scope) or mediation/litigation for simpler domestic contracts.

**Client withholds retention beyond the release dates**: If a client is holding the second half of retention beyond the DLP expiry without a valid reason:

1. The contractor should serve a formal payment notice under the contract and the Construction Act, stating the sum due and the release date.

2. If the client does not pay within the notice period, the contractor can issue a notice of intention to suspend performance (under the Construction Act) — a right to suspend work until the payment is made.

3. Adjudication (for contracts within the Construction Act's scope) is the fastest route to recover retention — an adjudicator's decision is usually made within 28 days and is binding pending any court challenge.

4. For simple domestic contracts below the threshold, the contractor's remedies are the same as for any debt: county court claim, statutory demand (for sums over £5,000), or small claims court (for sums under £10,000).

• **Avoiding retention disputes**:
• The most effective prevention for retention disputes:
• •Use a JCT Minor Works contract (the standard form for domestic projects under £150,000) — it provides a clear framework for retention, practical completion, DLP, and release dates
• •Issue a formal Practical Completion Certificate when the works reach practical completion — don't leave the practical completion date ambiguous
• •Serve the defects schedule in writing, early in the DLP, not on the last day
• •Release retention promptly at the required dates — don't use retention as informal leverage