How to set fair retention terms for construction work

When you commission building work for your business, a retention clause may allow you to withhold part of a payment until agreed milestones are met. That can provide security, but vague wording can lead to disputes over defects, release dates or sums that remain unpaid. The rules are also changing: the Commercial Payments Bill proposes a ban, but it is not yet in force. Check the contract and the law that applies when you sign.

What does a retention clause do?

A retention is money withheld from payments due under a construction contract, usually to provide an incentive to complete the work and address specified defects. The amount is not an automatic legal entitlement: it needs a clear contractual basis. Government material describes a typical range of 3% to 5% of contract value, but the figure is a description of common practice, not a prescribed rate, as set out in the government’s late-payment consultation.

For a client, withholding money may offer leverage if the contractor does not complete agreed work or remedy defects. For a contractor, it delays access to part of the contract price and can affect cash flow. If you are procuring work for your premises, put retention alongside the wider decisions involved in planning and managing construction work.

Which terms should you agree before work starts?

Make the retention clause specific enough that both parties can calculate what is due and when. Confirm:

• the percentage or fixed sum, and whether it applies to each interim payment or the whole contract value;
• any maximum amount that can be held;
• the event that triggers the first release, such as practical completion;
• the defects or rectification period, how it begins and ends, and the trigger for final release;
• how defects must be recorded, notified and given time to be corrected;
• the process for releasing any undisputed balance if part of the retention is contested.

Avoid relying on phrases such as “when all defects are resolved” without defining who decides what counts as a defect, how that decision is documented and what happens if the parties disagree. Align the main contract and any subcontract payment terms so that release dates and conditions are clear throughout the chain.

Should you use retention or another form of security?

Retention is one way of managing completion and defect risk, but it is not the only option. Depending on the project and the parties’ agreement, you could consider staged payments tied to inspected work, a defined defects process, or an agreed form of guarantee or surety. These options have different costs, administration and risk allocation; do not assume an alternative provides the same protection as cash withheld under a contract.

Compare the practical effect rather than just the headline percentage. Ask how quickly a defect can be identified, who will inspect it, how much money is actually needed to address the likely exposure, and whether withholding funds would create supply-chain cash-flow pressure. The government has said that the proposed ban could be accompanied by alternative surety products, but those products are not a universal or currently required substitute.

What is changing in the law?

The Commercial Payments Bill proposes to prohibit the deduction and withholding of retention payments under construction contracts. As of 2 October 2026, it remains a Bill, rather than an operative ban. The UK Parliament’s Bill tracker records its parliamentary progress, while the government says the proposed measure would take effect through commencement regulations following Royal Assent and include a two-year transitional period.

That distinction matters when you are negotiating now: do not assume a proposed ban has already invalidated a retention clause. Check the legislation’s status and any commencement regulations before signing or varying an agreement, particularly if the project will span a future implementation date. The clause should also be reviewed against the law and contract terms applicable to the particular project.

How can you administer the clause fairly?

At the start, record the agreed retention calculation and release dates in the payment schedule. During the work, keep payment assessments, completion records, inspection notes and defect notifications together. When a release condition is met, confirm it in writing and pay the amount due under the contract. If a defect remains, identify it specifically, retain only what the agreed wording permits, and document the steps and timetable for resolution.

At completion, check the final account against the contract: calculate the amount held, note any authorised deductions, identify sums not in dispute and confirm the date each balance is payable. Clear records make it easier to distinguish a valid contractual holdback from a payment disagreement and to spot a release that has been missed.

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