Last edited 03 Feb 2016

Retention bond

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.

Retention bonds may also be used as an alternative to retention between the employer and the main contractor.