25 March 2026 · Contracts & Risk
Retention in Construction Contracts: What Builders Need to Know
Retention is one of the most common sources of dispute in construction — not because the concept is complicated, but because the conditions for its release are often poorly understood, inconsistently applied, or never followed up.
What retention is
Retention is an amount withheld from each progress payment to the contractor, held by the principal (client) as a form of security. It exists to provide the client with financial leverage if the contractor fails to complete the works or rectify defects.
Under most standard contracts, retention is held at a rate of 5–10% of each progress claim, up to a maximum aggregate amount (typically 5% of the contract sum).
When retention is released
Retention is typically released in two tranches:
First release — at practical completion: half the total retention held is released when practical completion is certified. This reflects the fact that the main works are complete and the contractor's risk of non-completion has passed.
Second release — at the end of the defects liability period: the remaining retention is released when the Final Certificate is issued, confirming all defects have been rectified.
Some contracts deviate from this structure — single-tranche release, release tied to milestones, or security of payment legislation obligations that affect timing. Always read the specific contract terms.
Why retention disputes happen
Dispute 1: What constitutes practical completion? If the superintendent and the contractor disagree on whether practical completion has been reached, the first retention release is delayed. The contractor needs the cash flow; the client wants the leverage. This disagreement can persist for weeks.
Dispute 2: Defects that aren't defects. When the second retention release is due, clients sometimes issue a defects notice for items that are maintenance obligations rather than contractual defects. The contractor disputes the notice, the DLP period expires, and the retention is withheld indefinitely.
Dispute 3: Insolvent client. Under the old model (retention held in the client's operating account), a contractor whose client becomes insolvent during the project or during the DLP may find that the retention is gone. Changes to security of payment legislation in some states are addressing this, but it remains a risk.
From the head contractor's perspective
If you're a head contractor managing subcontractors, you're likely applying retention at both the head contract and subcontract levels. The subcontract retention timing should mirror the head contract — a subcontractor's retention should not be held longer than the equivalent retention at the head contract level.
Misalignment between head contract and subcontract retention terms creates both a cash flow problem and a potential security of payment exposure.
Practical steps
- Know your contract's retention rate, cap, and release conditions before the project starts
- Issue practical completion certificates promptly when the threshold is met
- Conduct a formal DLP inspection before the DLP expires and issue defects notices in writing
- Track the DLP expiry date — it's easy to lose track on a busy programme
Retention is not free money for the client. It's a temporary security. Managing its release correctly closes the project out cleanly.
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