What retention is for, and what it is not

Retention is a percentage deducted from each payment and held by the employer as security that the contractor will return and make good defects. That is the whole purpose. Everything else people use it for is a misuse with consequences.

Three things it is not

It is not a discount. The money belongs to the contractor. It has been earned by work that has been valued and certified. Holding it does not reduce the contract sum by a penny.

It is not a performance incentive. It is not there to make the contractor behave, and using it as leverage on an unrelated dispute is a misuse that tends to be recognised as one.

It is not a reserve against the account. Retention is not available to set against a disputed variation or an unrelated claim. Deductions of that kind require a pay less notice and a stated basis, and calling them retention does not change what they are.

What it costs the contractor

On a five million pound contract at three per cent, a hundred and fifty thousand pounds is withheld progressively, half released at practical completion and the balance a year later. The contractor finances that throughout.

Which is why it is priced. Retention is not free money for the employer; it is a financing cost that appears in the tender, and on a competitive job it appears in every tender equally.

Why it survives despite the complaints

Because the alternative is worse for employers. Once final payment has been made, an employer with a defect and no retention has a claim rather than a fund, and pursuing a claim against a contractor that has moved on is expensive and slow.

Retention converts that claim into a deduction, which requires no litigation and no cooperation. That asymmetry is the entire value of it and it is why proposals to abolish it keep failing.

Where it goes wrong

• Held after the obligation it secures has ended, which is simply late payment.
• Used against unrelated disputes, without a notice.
• Never released because nobody was tracking the date.
• Held from subcontractors at a higher rate than is held from the main contractor, and pocketed as working capital.

All four are common. None of them is what the mechanism is for.

The test

Ask what the retention currently held is security for. If the works are complete, the defects are made good and the certificate has been issued, the honest answer is nothing, and money held as security for nothing should be paid.