Retention in Construction Contracts: A Fair Practice or an Unnecessary Burden?
At KJM Ltd, we have increasingly come across cases where 5% retention is being applied, even when the main contract specifies a lower percentage. While retention remains a common feature of UK construction contracts—traditionally set between 3% and 5%—the higher end of this range is becoming more familiar. This raises concerns for subcontractors who often face tighter cash flow constraints. So, please check your contracts carefully to ensure retention terms are fair and aligned.
Legal Safeguards: Are They Sufficient?
The Construction Act Amendment 2011 ensures that subcontract retention should not be more onerous than the main contract retention (Build UK, 2023). This regulation aims to prevent subcontractors from facing stricter retention terms than those agreed upon in the main contract.
However, despite this safeguard, we continue to see cases where subcontractors experience higher retention rates and longer release periods than those set at the main contract level, raising concerns about enforcement and fairness.
A Shift in Retention Practices
Although legal protections exist, the industry has moved away from the traditional approach of:
✅ Releasing half of the retention at practical completion
✅ Releasing the remainder after a 12-month defects liability period
Now, it is increasingly common for the first portion to be withheld for 12 months, with the final release delayed until 24 months post-completion.
❌ 12-month retention release ➡ Now often delayed to 24 months ❌
This shift has significant financial implications, particularly in the current economic climate. With the Bank of England’s base interest rate at 4.5% (Bank of England, 2025), extended retention periods mean that funds are held for longer, impacting cash flow and reinvestment potential.
Financial Impact of Extended Retention
Retention acts as an interest-free loan from the supply chain to the employer. A £500,000 contract with 5% retention (£25,000) means not only over £1,000 in lost interest over two years but also not having access to that £25,000 for 12–24 months. On larger projects, such as a £5 million contract, this could exceed £10,000 in lost interest, with £250,000 tied up in retention, restricting working capital. For subcontractors managing multiple projects, the cumulative effect can be significant, further tightening cash flow and limiting the ability to invest in staff, training, and business growth.
The Bigger Picture: Is the UK Out of Step with Other Countries?
In some countries, retention has been abolished or significantly reduced, as industries recognise its financial impact and promote more collaborative payment structures. In contrast, the UK private sector appears to be maintaining or even tightening retention practices.
While retention continues to be seen as a tool for ensuring quality and compliance, the question remains whether it is the best approach in today’s construction environment. Given the financial pressures across the industry, could alternative payment security mechanisms be considered that protect clients while allowing contractors and subcontractors better access to funds?
Ultimately, the discussion around retention is not about removing financial safeguards but about ensuring they are fair, proportionate, and reflective of a modern construction industry.
References
Bank of England (2025) Monetary Policy Summary and Minutes – February 2025. Available at: https://www.bankofengland.co.uk (Accessed: 25 February 2025).
Build UK (2023) Minimum Standards on Retention. Available at: https://builduk.org (Accessed: 25 February 2025).