The Retention Money Clause in a Construction Contract (2026)

What is a retention money clause? A retention money clause lets the employer in a construction contract hold back a small percentage of each payment to the contractor, commonly around 5 percent, as security that the works will be finished and that any defects will be put right. The held-back money is not a penalty and is not the employer's to keep. It is released back to the contractor in stages, usually half when the works reach practical completion and the balance at the end of the defects liability period, once defects have been made good. The clause protects the employer against walking off or shoddy work, while the contractor accepts a temporary squeeze on its cash flow. This article is general guidance, not legal advice. Construction payment law, including statutory rules on retention and prompt payment, varies by jurisdiction, so have a qualified professional review any contract before you rely on it. ## Why retention exists Construction pays as the work proceeds, often monthly against certified value. That leaves the employer exposed on two fronts: the contractor could leave the job unfinished, and defects may only appear after the work looks complete. Retention answers both. By keeping a slice of each payment, the employer holds security that survives until the works are complete and the defects period has run, giving the contractor a financial reason to come back and fix problems rather than disappear. ## Typical percentages and release stages There is no single fixed rate, but common practice is: - Rate. Around 5 percent of the value of each payment, sometimes subject to a cap (a limit of retention) once a stated total is reached. UK projects often use 3 to 5 percent; some contracts elsewhere use 5 to 10 percent.

• First release, at practical completion. Usually half the retention (for example 2.5 percent of the contract value) is released when the works are certified as practically complete and usable.
• Final release, after the defects liability period. The balance is released at the end of the defects liability period (often 6 or 12 months after practical completion), once any notified defects have been made good and the works certified. Last verified October 2026. ## Sample retention money clause wording Adapt this to your contract and have it reviewed under the governing law. This is a drafting starting point, not a finished clause. ``` RETENTION (a) The Employer shall retain [5]% of the value certified in each interim payment (the "Retention"), up to a maximum total retention of [amount or percentage of the Contract Price]. (b) The Retention is held by the Employer as security for the due performance of the Works and the making good of defects. It does not constitute a payment to the Employer and the Contractor retains a beneficial interest in it [to be held in a separate retention account]. (c) One half of the Retention shall be released to the Contractor within [N] days of the certificate of Practical Completion of the Works. (d) The remaining half of the Retention shall be released to the Contractor within [N] days of the expiry of the Defects Liability Period of [6 / 12] months from Practical Completion, provided that all notified defects have been made good. (e) The Employer may deduct from the Retention the reasonable cost of making good any defect the Contractor has failed to remedy within a reasonable time after notice, and shall account to the Contractor for the balance. (f) In lieu of cash retention, the Contractor may provide a retention bond or bank guarantee for the equivalent amount, in a form reasonably acceptable to the Employer, in which case no cash shall be retained.

- The employer wants enough security, so it pushes for a higher percentage and a higher cap.
- The contractor wants to protect cash flow, so it pushes for a lower percentage, a firm cap so retention stops growing once it is meaningful security, and sometimes a reducing percentage as the job progresses. ### Release triggers and timing
- The contractor wants clear, automatic release dates tied to practical completion and the end of the defects period, with a short payment window and interest on late release.
- The employer wants release conditioned on defects being made good and on the relevant certificates being issued, not on the calendar alone. ### Holding the money
- The contractor may ask for retention to be held in a separate (trust or escrow) retention account, so the money is protected if the employer becomes insolvent. Employers often resist, so this is a real negotiation point and matters most where the employer's covenant is weak. ### Retention bond as an alternative
- Both sides increasingly consider a retention bond or bank guarantee instead of cash. The contractor keeps its cash, and the employer keeps security it can call on. Negotiate the form of bond, its amount and its expiry so it outlasts the defects period. ### Set-off against the retention
- The employer wants to deduct the cost of unremedied defects, and sometimes other claims such as liquidated damages, from the retention. The contractor wants deductions limited to the cost of making good defects, with notice and a chance to fix them first. ## A note on jurisdiction Retention practice varies by jurisdiction and by the standard form used. Internationally, FIDIC forms provide for retention and its release in two stages; in the United Kingdom, JCT and NEC forms set out their own retention and release mechanisms, and there is ongoing policy debate about protecting retention against contractor and employer insolvency. Several jurisdictions have construction payment legislation that affects how and when retention can be withheld and released. In India, registered micro and small enterprises may have statutory payment and interest rights under the MSMED Act, 2006 that interact with retention. Check the governing law and the standard form before concluding what is normal or enforceable. Last verified October 2026. ## Where a contract workspace helps The biggest failure with retention is not the clause, it is the calendar. The first release is usually remembered because practical completion is a visible event, but the final release turns on the end of the defects liability period, a date rarely written down anywhere, so the last tranche sits unreleased and unclaimed. Drafting a retention clause, reviewing the percentage, cap and release triggers, tracking the completion and defects-period dates, and governing the lot can happen in one AI workspace tuned to how your company builds and contracts. [Adira](https://adiralaw.com) is one tool that keeps a construction contract and its release dates in a single place. This guide by itself is enough to understand and negotiate a retention clause; a workspace simply makes sure both releases are prompted rather than forgotten.