Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate that is retained by the client. The purpose of retention is to ensure the contractor properly completes the works required under the contract. Half of the amount retained is released on certification of practical completion and the remainder is released upon certification of making good defects. Retention due to subcontractors may in turn be held by the main contractor and so on down through the contractual chain.
The recovery of retention is often a difficult area for parties in the contractual chain and cash flow problems frequently arise resulting from non-payment. In theory, this should be prevented by the Housing Grants Construction and Regeneration Act which disallows ‘pay when paid’ clauses, however, retention is commonly not released on time or in accordance with the contract. For subcontractors in particular, the release of retention may rely on circumstances outside of their contract or their control, for example, defects being remedied under the main contract by other parties.
Retention bonds are way of avoiding problems associated with retention recovery. Amounts that would otherwise have been held as retention are instead paid, with a bond being provided to secure the amount. Similar to retention, the bond’s value will usually reduce after the certification of practical completion.
Only if practical completion is not achieved by the subcontractor or if they prevent a certificate of making good defects from being issued will the retention bond take effect. The contractor is then able to ‘call’ on the retention bond.
A subcontractor is usually allowed a fixed period of time to rectify any defects, and this is stipulated by the retention bond. Should they fail to rectify the defect, the retention bond can be called on by the contractor and the surety must cover the remedial costs, before then pursuing the subcontractor.
Whilst subcontractors must pay the surety’s premiums, the benefit to them is that they do not have to chase retention monies post-completion, and no retention monies will be withheld. This cash flow security is often seen as worth the cost of the premium. Similarly, retention bonds are advantageous to contractors in improving the cash flow and financial stability of the subcontractor, making them less likely to default on the works.
Retention bonds include a fixed expiry date, making it clear when the subcontractor is released from its obligations.
 Related articles on Designing Buildings Wiki
- Advance payment bond.
- Bonds and guarantees (Aviva Insurance Limited v Hackney Empire Limited 2012).
- Bonds in construction contracts.
- Certificate of making good defects.
- Defects liability period.
- Final account.
- Parent company guarantee.
- Performance bond.
- Practical completion.
 External references
Featured articles and news
Urban Heritage, Development and Sustainability: international frameworks, national and local guidance.
What will the General Data Protection Regulations (GDPR) mean for you when they come into force in May?
Business Secretary chairs a new taskforce to monitor and advise on mitigating the impacts of Carillion’s liquidation.
Sir John Armitt is appointed the new chair of the National Infrastructure Commission.
High quality and high density homes - is it what we need or is it storing up trouble?
Government announces its intention to strengthen planning rules to protect music venues and neighbours.
National Audit Office reports that there is little evidence that PFI offers better value than other forms of contracting.
What is liquidation and how does it apply to contractors in the construction industry?
Scrutiny is placed on Carillion's controversial 2013 decision to extend subcontractor payment terms to 120 days.
RSHP unveil their involvement in a boundary crossing which will provide a new entry point into Hong Kong.
With PFI currently under the spotlight due to Carillion, this introductory article explains what they are.
Estimates suggest that up to 30,000 small firms could be at risk of non-payment as a result of Carillion's collapse.