Construction retentions come under the spotlight

Retention continues to be a key issue across the construction sector, particularly at a time when businesses are facing ongoing pressure on cashflow, margins and working capital.

With proposed legislative changes now bringing renewed focus to the topic, we asked construction law specialists Liam Hendry and Megan Green at Archor LLP to share their insights.

The article refers to an employer/contractor scenario but applies equally to a main-contractor/sub-contractor scenario.

Retaining the status quo?

The mere mention of the word “retention” will usually split a room of players on construction projects: employers like it as a low-cost/admin incentive for the contractor to complete the works and any snagging, and contractors envisage a drawn-out release process including spurious allegations of incomplete and defective work.

But how does retention work? Are there alternatives? And what is its future (if any!)?

What is retention and how does it work?

Retention is a contractual process which allows the employer to make deductions (usually 3% or 5%) from interim payments due to the contractor. The total sum deducted is usually released in two stages: 50% at practical completion of the works and 50% at the end of the defects liability/snagging period (which is usually 12 months later). JCT and NEC standard form contracts both provide for retention deductions.

The purpose of retention is two-fold: first, it provides an incentive for the contractor to complete the works and rectify any defects; and second, it gives the employer security (or a “pot” of money) to rectify any defects which the contractor refuses to. Employers like retention because it’s a low-cost/admin way to achieve those objectives.

So far, so good – although in practice retention is often not operated as it should be: retention is released late to contractors and/or employers raise late allegations of spurious defects to avoid releasing the money.

There have also been a spate of recent high-profile cases where parties have gone insolvent holding lots of deducted retention – for example Carillion held £800m in retention when it collapsed in 2018. In those circumstances the supply chain is unlikely to recover any of the retention (which is ultimately its money).

Are there any alternatives to retention?

There are some alternatives to retention as described above:

• Project bank accounts: A PBA is a bank account entered into in both the employer and contractor’s joint names. Any deducted retention could remain in the PBA and only released once an independent third party (for example, a contract administrator) certifies its release. That reduces the risk of the retention being held for too long and/or disappearing altogether.
• Retention bonds: A retention bond is a three-way contract between an employer, contractor and third-party surety allowing the employer to claim what would have been the retention sum from the surety if there are defects in the works.
• Parent company guarantees: A PCG is a guarantee from the employer’s parent company that it will honour the employer’s obligations under the main contract – specifically to release retention when due.

The above alternatives all shift risk towards the employer (which is not the general direction of travel!) and have been cited as too costly/onerous to operate. We therefore expect that they will not be as popular as traditional retention until the Commercial Payments Bill comes into force (see below).

How to recover retention?

We often assist contractors with recovering outstanding retention. The first step is to review the relevant contract and establish when the retention is due to be released and how to apply for it. The contractor should then make a compliant payment application for the retention. This is important – we are often approached by contractors who have only requested the retention in an email or by an invoice, neither of which might be sufficient to trigger release.

There are some things which contractors should look out for when applying for retention:

• Pay when paid clauses: We often see retention release dates which depend on certificates being issued under other contracts. Those are “pay when certified” clauses and void under the Construction Act. In those circumstances the retention mechanism is likely defective, and any sums deducted are immediately due for repayment.
• Lack of a making good certificate: Employers will often refer to the lack of a practical completion/making good certificate as a way to avoid paying retention. However the test is when the relevant certificate should have been issued (even if it hasn’t) – see DR Jones Yeovil Ltd v Stepping Stone Group Ltd [2020] EWHC 2308 (TCC).
• Set-off/deduction: The default position is arguably that an employer holds retention on trust for the contractor and the money should be ring-fenced (for example, in a separate account). That duty, however, might be watered down by the contract and the employer may have rights to deduct from retention if there are actual or anticipated defects in the works.

If the payment application above does not result in payment, then the contractor can use formal dispute resolution procedures (for example, adjudication) to recover the retention.

What’s next for retention?

As mentioned above there have been a series of high-profile construction insolvencies where large sums of deducted retention – which is effectively the supply chain’s money – have evaporated.

In May 2026, the UK Government introduced the Commercial Payments Bill, part of which looks to abolish retentions under construction contracts, to deal with the issue above.

The Commercial Payments Bill allows a 2-year transitional period, after which retention clauses will be banned outright. If an employer wrongly deducts/withholds retention once the ban is in force it will be liable for a penalty of 50% of the deducted sums.

At the time of writing the Commercial Payments Bill is due for a second reading in the House of Lords and is bound to stimulate lively debate from both sides of the retention fence – watch this space!

Guest article provided by Liam Hendry, Legal Director, and Megan Green, Associate, at Archor LLP, who advise businesses across the construction sector on contractual, commercial and dispute-related matters.

Email liam.hendry@archor.co.uk, call 01206 687365 or visit archor.co.uk to find out more.