Retention in Construction: What It Is & How to Manage It

John Fisher
By
John Fisher
Feb 13, 2025
Retention in Construction: What It Is & How to Manage It

Retention is a critical financial tool in the building and construction industry, designed to protect the interests of project owners and ensure contractors deliver quality work. Despite its importance, retention can be a point of contention and confusion, particularly when it comes to managing and claiming retention money. This comprehensive guide explains retention in detail, provides practical examples, and outlines strategies to navigate retention-related challenges.

TL;DR
  • Retention is withheld 5-10 percent from progress claims to ensure contract completion.
  • Released in two stages: half at practical completion, the rest after the defect liability period.
  • Protects project owners by ensuring quality work and covering defect repairs.
  • Impacts contractors' cash flow if delayed or mismanaged.
  • Defined in contracts with terms on percentage, release conditions, and retention cap.
  • Can be held too long due to disputes, defects, financial issues, or admin delays.
  • To claim retention, contractors must submit claims, follow up, and escalate if needed.
  • Mastt helps track retention for timely payments and contract compliance.

What is Retention in Construction?

Retention in construction is a contractual payment withholding practice where the project owner withholds 5-10% of each progress claim as a retention payment to ensure the contractor meets all obligations. This retained amount, also called retention money or a retention fee, is released in two stages:

  1. Practical completion – A portion of the retention payment is released when the project is substantially complete.
  2. End of defect liability period – The remaining retention money is paid after all defects are rectified.

Retention fees serve as financial security, ensuring contractors complete the work to required standards and fix post-completion defects.

How Does Retention in Construction Work?

Retention in construction works by withholding a portion of each payment throughout the project and releasing it in stages. Here’s how the process unfolds:

1. Retention Deduction from Progress Claims

Every time a contractor submits a progress claim, 5-10% is withheld as retention money. For example, if a claim is $100,000, the contractor receives $95,000, and $5,000 is retained. This continues until the total retention reaches the agreed limit (often 5% of the contract value).

2. Accumulation Over the Project

Since retention is withheld from every claim, the total retention amount increases over time. On a $1,000,000 project, up to $50,000 may be held back.

3. Partial Release at Practical Completion

Once the project reaches practical completion, typically half of the retention money (e.g., 2.5% of the contract value) is paid back. This ensures the contractor has completed most of the work before final payment.

4. Final Release After the Defects Liability Period (DLP)

The remaining retention fees are held for 6-12 months to cover defects that may arise. If the contractor fixes all issues, the final balance is released. If not, the withheld funds may be used for repairs.

5. Delays and Risks in Retention Payment

Retention payments should be released on time, but delays are common, causing cash flow problems for contractors. It's crucial to track retention terms in contracts and ensure payments are made as agreed.

Why is Retention Important in Construction?

Retention is crucial in construction because it protects project owners, ensures quality work, and mitigates financial risks. It benefits both project owners and contractors in different ways.

For Project Owners

  • Quality Assurance – Encourages contractors to complete work to required standards.
  • Risk Mitigation – Reduces financial risk if a contractor fails to meet obligations or becomes insolvent.
  • Defect Rectification – Ensures funds are available to fix issues during the defect liability period.

For Contractors

  • Accountability & Performance – Incentivizes contractors to meet project timelines and standards.
  • Financial Impact – While retention money secures contract fulfillment, it can also restrict construction cash flow, affecting financial stability.
  • Retention Fund Management – Head contractors must collect, hold, and release retention fees properly, ensuring subcontractors get their rightful payments.

Although retention payments provide security, delays in releasing retention funds can create cash flow challenges. Understanding contract terms and tracking retention money can help mitigate risks.

Infographic showing the pros and cons of retainage in construction, highlighting its benefits and risks.
Retainage keeps contractors accountable but can strain cash flow—balance is key in construction projects.

Retention Clause in Contracts

A well-defined retention contract clause is crucial for avoiding disputes. It typically includes:

  1. Retention Percentage: The percentage of each progress payment to be withheld (e.g., 5-10%).
  2. Release Terms: Conditions for releasing retention money, such as practical completion or rectification of defects.
  3. Defect Liability Period: The timeframe during which defects must be addressed, often lasting 6-24 months.
  4. Retention Cap: Some contracts set a maximum retention amount to prevent excessive withholding.

Clear and transparent clauses reduce ambiguity and foster trust between project owners and contractors.

How Long Can Retention Money Be Held For?

The duration for holding retention money depends on the contract terms, project complexity, and local regulations. Generally, retention funds are withheld during the project and for a set period after completion to cover potential defects.

Retention Money Holding Periods

  1. Project Execution Phase – Retention is deducted from progress claims throughout the project and held until practical completion.
  2. Defect Liability Period (DLP) – After practical completion, the remaining retention fees are held for 6-24 months, depending on the contract.
  3. Final Release – The full retention payment is made once the defects liability period ends, and all issues are resolved.

Factors That Affect Retention Duration

  • Contract Terms – Some contracts specify shorter or longer retention periods.
  • Project Type & Complexity – Large-scale projects may require extended retention holding.
  • Local Regulations – Laws in some regions dictate maximum retention holding periods.

Construction companies, homeowners, and head contractors can hold retention money until the end of a defects notification period as stipulated in construction contracts. The duration for holding retention money varies depending on the contract, the complexity of the project, and local regulations. Contractors should carefully review their contracts to understand the specific timelines.

Collecting Retention Money

Collecting retention money requires careful contract management, documentation, and proactive follow-ups to avoid delays. Here’s how contractors can ensure a smooth and timely collection process:

Steps to Collect Retention Money

  1. Ensure Contractual Compliance – Maintain detailed records of work completed, progress claims, and defect rectifications to support your claim.
  2. Submit a Formal Claim – Request the release of retention payment as soon as the contractually agreed conditions are met. This typically includes reaching practical completion and defect liability period expiry.
  3. Communicate with Project Owners – Engage with owners, head contractors, or contract administrators to confirm there are no outstanding issues.
  4. Monitor & Follow Up – Regularly track the status of your retention fee claim to prevent unnecessary delays. If payment is withheld without reason, escalate the issue per contract dispute resolution terms.

Understanding Payment Withholding Requests

In construction, a payment withholding request allows head contractors to retain money from subcontractors until they fulfill their obligations. However, retention cannot be held indefinitely—subcontractors must receive payment once they meet contract conditions. Ensuring clear contract terms and active tracking can prevent retention disputes.

What to Do if Retention Isn’t Released

If retention money isn’t released on time, contractors risk cash flow issues and contract disputes. Follow these steps to recover withheld retention fees efficiently:

1. Review Contract Terms

  • Check retention clauses in your contract, including release conditions, timeframes, and dispute resolution steps.
  • Verify if the defect liability period (DLP) has ended and if all requirements were met.

2. Send a Formal Retention Payment Request

  • Submit a written claim requesting the release of retention fees, referencing contract terms.
  • Include evidence of completed work, defect rectifications, and any required approvals.

3. Communicate with the Client or Head Contractor

  • Follow up persistently to confirm the reason for the delay.
  • If necessary, request a written response outlining why the retention money hasn’t been released.

4. Escalate the Issue if Necessary

  • Issue a formal notice of dispute if retention payment is being unfairly withheld.
  • Refer to industry regulations, such as the Security of Payment Act (if applicable in your region).
  • Seek legal advice or mediation if the issue remains unresolved.

5. Improve Future Retention Management

  • Negotiate better contract terms to reduce retention risk in future projects.
  • Track retention deadlines using contract management software to ensure timely claims.

Having your construction contract reviewed can also be crucial in minimizing risks related to cost, time, and quality, especially in disputes over retention money.

Why Retention May Not Be Paid

Retention money may not be paid due to contract disputes, project defects, financial issues, or regulatory non-compliance. The release of retention fees depends on fulfilling contract conditions, and any unresolved issues can lead to withheld payments.

Common Reasons Retention Money is Withheld

  • Unresolved Defects – If defects found during the defect liability period (DLP) aren’t fixed, the retention payment may be held.
  • Contractual Non-Compliance – Failure to meet contract terms, warranties, or milestones can delay retention release.
  • Client or Head Contractor Cash Flow Issues – Financial struggles may lead to delayed or withheld retention fees.
  • Administrative or Documentation Delays – Missing completion certificates, defect reports, or final claim submissions can stall payment.
  • Disputes Over Project Quality – Clients may argue that work doesn’t meet contract standards, delaying final retention money release.
  • Legal or Regulatory Holds – Some jurisdictions allow funds to be held due to disputes under Security of Payment laws.

For example: A contractor completes a commercial building project and requests final retention payment after the 12-month DLP ends. However, the client refuses to release the funds, claiming minor cracks in the flooring need repair. Even though the issue is minor, the contractor must rectify defects before retention is released, leading to delays.

Retention money should be released fairly and on time, but delays and disputes are common. Contractors must track deadlines, maintain proper documentation, and escalate issues when necessary to ensure smooth payment recovery.

Understanding these rights fosters fair practices and minimizes disputes.

Enforcing Retention Rights

Enforcing retention rights is crucial for subcontractors to ensure they receive the retention money they are entitled to. Here are some steps to enforce retention rights:

  1. Review the Construction Contract: Start by thoroughly reviewing the construction contract. Pay close attention to the retention clause and the agreed-upon amount of retention money. Understanding these details is essential for knowing when and how you can claim your retention money.
  2. Keep Accurate Records: Maintain detailed records of all work completed, payment claims submitted, and any communication with the principal contractor. This documentation will be invaluable if you need to prove that you have met all contractual obligations.
  3. Issue a Payment Claim: When the time comes to claim your retention money, include it in your payment claim. Ensure that your claim is submitted within the prescribed time frame outlined in the construction contract.
  4. Follow Up with the Principal Contractor: If the principal contractor fails to pay the retention money, send a written notification requesting payment. Clear and prompt communication can often resolve issues without further escalation.
  5. Seek Adjudication: If the principal contractor still refuses to pay, consider seeking adjudication to resolve the dispute. Adjudication is a legal process that can help enforce your rights and ensure you receive the retention money you are owed.

By following these steps, subcontractors can effectively enforce their retention rights and secure the funds they are entitled to.

Best Practices for Contractors

To avoid disputes and ensure smooth payment of retention money, contractors should follow these best practices:

  1. Clearly Outline the Retention Clause: Ensure that the construction contract clearly outlines the retention amount, payment terms, and conditions. A well-defined retention clause can prevent misunderstandings and disputes down the line.
  2. Communicate with Subcontractors: Keep subcontractors informed about the retention money and the payment process. Clear communication helps manage expectations and fosters a collaborative working relationship.
  3. Make Timely Payments: Pay retention money within the agreed-upon time frame to avoid disputes. Timely payments demonstrate good faith and can help maintain positive relationships with subcontractors.
  4. Maintain Accurate Records: Keep detailed records of payment claims, invoices, and communication with subcontractors. Accurate documentation is essential for tracking payments and resolving any potential disputes.
  5. Review and Update Contracts: Regularly review and update construction contracts to ensure they comply with current laws and regulations. Staying up-to-date with legal requirements can help avoid compliance issues and protect your interests.

By adhering to these best practices, contractors can manage retention money more effectively and minimize the risk of disputes.

FAQs About Retention in Construction

No, retention money cannot be withheld indefinitely. Contracts typically specify clear timelines for its release. However, delays can occur due to disputes or unresolved issues. It's important to refer to the terms outlined in the contract to resolve such matters.
Yes, alternatives such as performance bonds or bank guarantees can be used instead of retention money. These tools provide project owners with financial security while reducing the cash flow impact on contractors.
Disputes over retention money are typically addressed through contract provisions, negotiation, or legal remedies. Clear documentation and open communication between the client and contractor are key to resolving such issues efficiently.
Yes, many jurisdictions have laws or guidelines that regulate retention practices, including maximum percentages, timelines for release, and dispute resolution processes. Familiarity with local regulations is essential for both contractors and project owners.
Retention is not typically intended to cover project delays unless delays result in additional costs related to defect resolution or unmet contractual obligations. Penalties for delays are usually addressed separately in the contract.
John Fisher

Written by

John Fisher

John Fisher is a Product Manager with 8 years of experience, specializing in product development and management. As a key player at Mastt, John has been instrumental in creating and refining products that meet customer needs. His vision is to continuously improve product offerings and drive innovation in the industry. Outside of work, John enjoys exploring new technologies and trends in product management.

LinkedIn Icon

Powering Construction Project Management with easy-to-use tools