[1] A retention is money withheld by one party in a contract to act as security against incomplete or defective works.
There has been criticism of the practice for leading to uncertainty on payment dates, increasing tensions between parties and putting monies at risk in cases of insolvency.
The practice of retainage dates back to the construction of the United Kingdom railway system in the 1840s.
Accordingly, a common approach that contracting parties take in order to mitigate this risk is to include retainage provisions within their agreements.
The concept of retainage is unique to the construction industry and attempts to do two things: provide an incentive to the contractor or subcontractor to complete the project and protect the owner against any liens, claims or defaults, which may surface as the project nears completion.
[5] Retentions are widely used in the British construction industry: in the majority of all contracts awarded,[3]: 27 a sum of money is withheld as a security against poor quality products (defects) or works left incomplete.
This period is the time during which the client is able to identify works that are defective to the contractor who must then remedy them; it is often twelve months.
[3]: 27 Retentions held against sub-contractors are also a key source of cash for main contractors, who may use them to finance new projects.
[3]: 22 There is no current requirement for retention monies to be ring-fenced (kept separately to general company funds and preserved from spending) and they are usually held in a client's or contractor's main bank account.
[9] This can cause problems in cases of insolvency, where the money can be lost and payments owed to the supply chain put at risk.
[3]: 22 The use of retentions (which are considered a form of stage payments) can also render construction companies unsuitable for factoring (the sale of accounts receivable).
Railway companies therefore began withholding a minimum of 20% of payments to contractors as a security against incomplete and defective works.
[3]: 33 The 1994 Latham Report recommended that legislation be introduced to protect retention monies held by a party, which would prevent it being lost during a liquidation.
[13] The Build UK industry group aimed to secure abolition of retentions by 2025, following an ambition outlined by the Construction Leadership Council in 2014.
[9] Alternatives include project bank accounts (which are used for all payments from the client and contractor), retention bonds (see below), performance bonds, escrow stakeholder accounts (monies held by a third party), parent company guarantees (guarantee of completion by the main contractor's parent organisation) or trust funds to hold retention monies.
Build UK and its predecessor, the National Specialist Contractors Council, have endorsed the use of retention bonds in their Fair Payment Campaign.
The 1998 revision of the contract allowed the contractor to request that the client hold the money in a separate bank account; it also permitted the use of retention bonds.
The contract also allows for retention to be withheld only on the labour-element of any price or only to be applied on the final few payments made.
[22] A third approach is to carve out material costs from a withholding requirement on the theory that suppliers, unlike subcontractors, may not accept retainage provisions in their purchase orders.
Retainage clauses are usually found within the contract terms outlining the procedure for submitting payment applications.
Another problem arises when the contractor withholds from its subcontractors at a greater percentage than the owner has withheld from them.
Determinations to retain and the specific amount to be withheld shall be made by the contracting officers on a case-by-case basis.
[26] Other alternatives to retainage are to allow the contractor to supply substitute security to the owner in the form of a performance bond, bank letter of credit, or a security of, or guaranteed by, the United States, such as bills, certificates, notes or bonds.
[3]: 164 Retentions are common in Qatar where the proportion retained may be up to 30% of contract value due to the large number of foreign companies that operate under limited liability law in the state.
[3]: 24 [3]: 164 However, after the 2019 collapse of Stanley Group it was discovered that retention money was not properly administered, residing in the company's main account, despite the group claiming to sub-contractors that it had been held in separate accounts, and was therefore liable to loss during the liquidation process.
[28] The retention system is not used in Germany where the works remain the property of the contractor until completion and are, therefore, liable to be withheld from the client in cases of dispute.