Retention in construction is the portion of each payment that is held back from a contractor or subcontractor until the work is complete and approved. In the US it is often called retainage. Most UK contracts include it. The rate is agreed in the contract and is usually between 5% and 10%, often 5% and sometimes 10%. It is taken off each valuation or application for payment and shown on the payment certificate. It is released when the work is signed off or when the defects period is over.
Retention is a common practice in construction contracts. It provides project owners with a financial buffer against potential risks, such as incomplete work, delays, or defects. By withholding a portion of payments, project owners safeguard their investment and ensure the contractor’s accountability. This approach helps maintain contractor motivation to meet contractual obligations. It also ensures that any outstanding issues are addressed before the final payments are released. For the contractor, retention is income that has already been earned and not yet collected, which is why it needs to be tracked as carefully as any other receivable.
Why Is Retention Used in Construction?
Retention is a vital component of construction contracts, offering a range of benefits to project owners and stakeholders. Here are the key reasons retention is widely used:
Quality Assurance
Retention ensures that contractors deliver work that meets the required standards and specifications outlined in the contract. By withholding a portion of the payment, project owners can safeguard against substandard materials or workmanship, incentivising contractors to focus on quality throughout the project. This financial reserve serves as a guarantee that issues, if any, will be resolved promptly to meet expectations.
Completion Guarantee
Another purpose of retention is to give the client a hold over contractors and subcontractors until they fulfil all their obligations. In cases where tasks are incomplete or defects are identified during inspections, the retained amount can be used as a financial incentive for the contractor to address these issues. This process minimises the risk of disputes and ensures the project reaches full completion according to the agreed terms.
Risk Mitigation
Retention serves as a financial safety net for project owners in case contractors default on their responsibilities or abandon the project. By holding back a percentage of the payments, project owners can reduce their exposure to financial loss and have a fallback to fund necessary corrective actions. This measure is especially important for large and complex projects where unforeseen challenges can arise.
By addressing these key areas, retention not only protects the interests of project owners but also promotes accountability and professionalism within the construction industry.
How Does Retention Work in Construction?
Retention operates as a phased financial process, ensuring contractors remain committed to project completion while providing a safety net for project owners. Here’s how it works:
During the Project
Throughout the project, a percentage of the contract value is withheld from each progress payment issued to the contractor or subcontractor. In the UK the deduction is made on each valuation or application for payment and shown on the payment certificate. For example, if the retention rate is 10%, a contractor invoicing £50,000 for a phase of work will only receive £45,000, with £5,000 retained by the project owner. This retained amount gives the client a reason to check ongoing work against contractual requirements and quality standards.
Upon Completion
Once the project reaches completion, the withheld amount, referred to as the retention payable, is released. In most UK contracts this happens when the work is signed off or when the defects period is over. The release typically occurs after the project owner has confirmed that all work has been completed satisfactorily and any defects or snagging items have been resolved. Releasing the retained funds marks the conclusion of financial obligations, ensuring contractors are rewarded for fulfilling all contractual commitments. Retention release is usually settled as part of the final account in construction.
This two-stage process ensures that financial incentives align with project milestones and completion, offering security to project owners while motivating contractors to maintain quality and efficiency.
Where Retention Is Created
A main contractor sits on both sides of retention. It is created at two moments:
- You send a valuation or application for payment to the client. The client deducts retention.
- Your subcontractor sends you a valuation or application for payment. You deduct retention.
So there is retention that should come in from clients and retention that should go out to subcontractors. Both start from valuations. Both often end up split across projects and inboxes, which is where the trouble starts.
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UK Retention Rates: the 5% and 2.5% Defaults, and When They Are Released
Most UK main contracts settle on a retention rate of around 5%, deducted from each valuation while the works are on site. Once practical completion is certified, it is common for half of that to be released straight away, leaving 2.5% held through the defects liability period. Law firm Pinsent Masons describes the same split, noting that retentions are usually 3% to 5% of the contract sum, with half released at practical completion and the rest held until the end of the defects liability period, typically 12 months later. NEC’s own commentary on the industry’s Build UK reform proposals confirms the same pattern from the other direction: “current practice is that retention amounts often start at 5% and are reduced to 2.5% at completion, especially on lower-value projects” (sources: pinsentmasons.com, neccontract.com).
Back to the £50,000 valuation from the example above. If the agreed rate is 5% rather than 10%, £2,500 is held back instead of £5,000. Half of that, £1,250, is released once practical completion is certified. The remaining £1,250 sits with the client until the defects liability period ends and making good is signed off, at which point it becomes due in full. None of this changes how you raise the valuation. It only changes when the retained part of it comes back to you.
What JCT and NEC Contracts Say About Retention
Retention is not invented by each client on the day. It sits inside the standard forms most UK projects are built on, and inside the wider payment rules that apply regardless of which form is used.
Under the JCT Design and Build Contract 2024, retention is dealt with in clauses 4.16 to 4.18, which cover how retention is treated, retention bonds, and the retention amounts and periods that apply (source: jctltd.co.uk). Older JCT editions carry the same mechanism under slightly different clause numbers, so always check the edition you are actually signed up to rather than assuming the number carries across.
NEC4 contracts take a different starting point. Retention is not one of the core clauses, so it only applies if the parties add secondary Option X16, which sets the retention percentage in the Contract Data and ties release to completion and to the defects certificate (source: neccontract.com). That is also why some NEC projects run with no retention at all: if X16 is left out, nothing is withheld.
Both forms sit underneath the Housing Grants, Construction and Regeneration Act 1996, the “Construction Act,” which sets the UK’s statutory payment and adjudication rules. The Act does not ban retention, but a 2011 amendment to it did close one loophole: a construction contract can no longer make the release of retention conditional on something happening under a separate contract, a practice known as “conditional payment” (source: corporate.jctltd.co.uk, citing CMS Cameron McKenna Nabarro Olswang LLP). If a client tries to tie your retention to a contract you are not even party to, that clause is unenforceable.
Is There a Ban on Construction Retention in the UK?
Not yet, but it is coming. On 24 March 2026 the government confirmed, in its “Time to Pay Up” response to the late payment consultation, that it will ban the withholding of retention payments under construction contracts, as part of what it calls the biggest reform to late payment practices in over 25 years (source: gov.uk). The ban is carried in the Commercial Payments Bill, alongside a 60-day cap on payment terms for large firms paying smaller suppliers and mandatory statutory interest of 8% above the Bank of England base rate on late payments. The government has said it will consult further on the timing for implementation, so the ban is confirmed in principle but not yet in force (source: gov.uk, Commercial Payments Bill overview).
The scale of the problem is why the government moved. Speaking on the Bill, Lord Leong cited Construction Leadership Council figures that put £4 billion to £6 billion of retentions held across the industry at any one time, with around £223 million lost every year when a business holding retention becomes insolvent (source: smallbusinesscommissioner.gov.uk). Until the ban actually takes effect, existing contracts carry on as before, which means the tracking problem described in this article is not going away soon.
Key Terms to Know About Construction Retention
Understanding the terminology associated with construction retention is essential for clear communication and effective financial management. Here are the key terms explained:
Retention Amount
The retention amount refers to the specific percentage or fixed sum of money withheld from each payment made to the contractor or subcontractor. This is typically agreed upon in the contract, with standard rates ranging between 5% and 10% of the payment. The retention amount acts as a financial reserve, ensuring that contractors remain committed to completing the project and addressing any issues that arise.
Retention Billing
Retention billing involves the process of documenting and invoicing the retained and payable amounts. Contractors or subcontractors issue invoices that clearly indicate the total payment for work completed, the portion retained, and the net amount payable. This ensures transparency for all parties and helps track the retained funds throughout the project’s lifecycle.
Retention Payable
Retention payable is the total amount of withheld funds due to be released to the contractor or subcontractor upon successful completion of the project. This release is typically contingent on the project owner’s satisfaction with the work. Including the resolution of any defects, and the fulfilment of all contractual obligations. The retention payable serves as the final settlement, marking the conclusion of financial dealings for the project.
By familiarising themselves with these terms, stakeholders can better navigate retention agreements, so that all financial processes align with project goals and timelines.
Benefits of Retention in Construction
Retention offers key advantages that benefit both project owners and contractors:
Financial Protection for Project Owners
For project owners, retention serves as a safeguard against potential risks, ensuring the work is completed to the agreed standards. By holding back a portion of payments, owners keep the means to address issues such as unfinished tasks or defects. This practice fosters accountability among contractors and gives owners confidence that their investment is protected until the project meets contractual requirements.
Motivation for Contractors
Retention creates a strong incentive for contractors to prioritise project completion and adhere to deadlines. Knowing that a portion of their payment is contingent on satisfactory performance encourages contractors to maintain quality and efficiency throughout the project lifecycle. This dynamic fosters a collaborative effort toward successful project delivery while minimising delays or lapses in work quality.
Challenges of Retention in Construction
Despite its advantages, retention also presents challenges, particularly for contractors and subcontractors:
Cash Flow Impact
One of the most significant challenges of retention is its impact on cash flow, especially for smaller contractors or subcontractors. Withheld payments can create financial strain, making it harder for these businesses to cover operational costs, purchase materials, or pay their own employees. This issue is exacerbated in long-term projects where retention amounts accumulate over time, creating a gap in the contractor’s available funds.
Risk of Disputes and Delays
Retention often becomes a point of contention, particularly when there are disagreements over the quality or completion of work. Disputes between contractors and project owners regarding the release of retained funds can lead to delays, legal challenges, and strained relationships. Without clear communication and well-documented retention terms, resolving these issues can be time-consuming and costly.
Retention That Is Never Claimed
Retention is one of the few places in construction where the money is already yours. You valued the work and you delivered it. The client only held part of the payment back because the contract said so. If that retention sits in a forgotten spreadsheet or in someone’s inbox after the release date has passed, you are lending money to the client for free. Across 15 or 20 live jobs the unclaimed amounts add up to profit that was earned and never collected.
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Why Retention Gets Forgotten
Retention rarely goes unclaimed because somebody decided to write it off. It goes unclaimed because the number is stored somewhere nobody looks at the right time. The usual reasons are below.
Dates Move
Practical completion can shift. Warranty or defects periods can change. If you guessed the release date in Excel on day one, you now have the wrong date.
Valuations Live in Email
A lot of valuations and payment certificates arrive in a shared accounts inbox. Someone has to open the email and move the number into the project sheet. If that person is off, the retention is invisible.
Client and Subcontractor Retention Are Kept Apart
You might see what you owe to subcontractors because you are paying them this month. You might not see what the client still owes you because that sits on a certificate from months ago.
Headcount Is Smaller
When the business was bigger, someone in commercial or finance had time to chase retention. After a restructure the same team must handle invoices, approvals and reporting. Manual retention lists lose the race.
Spreadsheets Do Not Remind
A spreadsheet will hold the number. It will not tell you that a retention release is due 60 days from now.
How to Track Retention Owed and Retention Held
Retention is really two reports:
- Retention to receive from clients.
- Retention to release to subcontractors.
If you can see both in one place, you can plan cash. You can speed up claims on the client side and schedule releases on the subcontractor side within the contract rules. Here is what that view looks like for the next 60 days:
Retention to receive in next 60 days: £74,000
Retention to release in next 60 days: £32,000
The business now knows it has at least £42,000 of net cash to go after. Without the two numbers side by side, the £32,000 going out is visible because it is in this month’s payment run, while the £74,000 coming in sits on old certificates and is easy to miss.
Why Spreadsheets Are Not Enough
Spreadsheets are good for one project and one person. They struggle when:
- the valuation date changes
- the defects period changes
- you have 15 or 20 live jobs
- invoices come in through email and not through the sheet
- you need to show management retention across all projects
A spreadsheet cannot link retention back to the contract and warn you if the numbers do not match. A system that already updates the budget when invoices and commitments are approved can do that inside the same workflow. You do not need to change how you do valuations. Keep valuing work the way your client wants it, and make sure the retention line lands in a system that reminds you when to claim or release it.
Final Thoughts
Retention in construction is a mechanism to balance trust and accountability between project owners and contractors. It protects the client, and it also ties up money the contractor has already earned. Managing it well means tracking what you are owed and what you hold, with dates, so that nothing goes unclaimed and nothing is released late. Modern construction management tools can keep that list in the same place as your valuations, contracts and invoices.
Effortless Retention Tracking and Calculation with Planyard
Planyard builds retention into the overall financial workflow of your construction projects. Since contracts, valuations, invoices and purchase orders are all managed within the platform, retention is tracked at the point where it is created. You set the retention percentage when you upload the contract, and every valuation or progress report on that contract automatically holds back the right amount. There is no separate sheet and no manual calculation, which removes a common source of errors.
Because approved costs are reflected in the budget right away, retention becomes part of the same flow and project finances stay in one place. You can filter for retention that is due from clients and retention you must release to subcontractors across all projects, which gives you the 60 day view described above. When the warranty or defects period is over, you release retention with a proper audit trail and it goes to accounting through the integration.
With Planyard, you gain clear visibility into retained amounts at every stage of the project. The platform provides real-time updates on retention balances, invoices and pending payments, making it easier to manage cash flow and plan finances. Retention is created when the valuation is created, and keeping it in the same system means it cannot be forgotten. This helps contractors and project owners avoid disputes and keep projects on track.
Running Warranty Period Projects in Planyard
Many Planyard users handle retention in the warranty or defects period with a simple three-step routine, rather than building a separate tracker for it.
- Once the main works are certified, change the project’s status to warranty period project on its dashboard. The retention you are owed and the retention you still owe subcontractors stay visible in the budget, separate from live, under-construction projects.
- When you are ready to release retention, process the client’s sales invoice or your subcontractor’s purchase invoice against that warranty period project exactly as you would any other invoice. There is no separate release step.
- Check all warranty period projects on one dashboard. You can see what is still owed to you by clients and what you still owe subcontractors across the whole portfolio, so nothing gets billed twice or forgotten.
Planyard is our product. If you are choosing a system for subcontractor applications, retention and payments, our guide to the best subcontractor management software compares the UK options.