Holding on for dear life: Retention in the construction industry

As recent transparency rules shake up payment practices, is the industry finally letting go of its grip on retentions - or just finding new ways to hold on?

In the world of construction, one thing which seems built to last is the practice of retention. At a basic level, retention is a mechanism by which the client on a construction project keeps back a certain percentage of the value of the works from the payment to the contractor, until practical completion (when usually one half is released) and/or expiry of the defects rectification period (triggering release of the balance).

Probably the most widely used form of performance security, the idea is that applying retention encourages the contractor to complete the works and remedy defects in accordance with the building contract - and ring-fences cash that the client can use to attend to outstanding works should the contractor become insolvent.

A tool that has been used for well over a century, retention figures vary from contract to contract, reflecting the specific project. Most standard forms use a default of 5% of the contract sum. That percentage can be higher in circumstances where there are specific performance security risks - and sometimes lower too.

In theory, it's a pragmatic solution. In practice, it can be a headache, causing cash flow issues (against typically low profit margins) and - in our experience - mistrust stemming from unfair withholding and undue delays in releasing retention, the ultimate risk being retention permanently lost through upstream insolvency.

"Cash flow is the life blood of the building industry" was a phrase coined by Lord Denning back in 1971. That sentiment was echoed again in Sir Michael Latham's "Constructing the Team" report in 1994 which led to the Housing Grants, Construction and Regeneration Act 1996.

The Construction Act (as it is better known) has been an important part of the law affecting the construction industry since it came into force in 1998 - indeed, it singlehandedly created an opportunity for this then newbie lawyer to advance a career in construction law - but what it didn't do is resolve the well-known concerns in the industry about retention.

The use of retention has remained under the spotlight all of these years. A number of bills have been presented to the UK Parliament to reform retention, none of which passed into law.

What we do now have, however, is The Reporting on Payment Practices and Performance (Amendment) Regulations 2025

For "qualifying construction contracts", these regulations seek to bring greater transparency to retention practices, and to drive culture change by requiring:

• mandatory reporting of retention terms and timelines in public sector contracts

• clearer contractual language around when and how retention will be released

• tighter monitoring and enforcement by contracting authorities

• encouragement of alternatives such as project bank accounts or performance bonds

While not going as far as some might have pushed for - banning retention outright - the regulations indicate a change in direction. After all, transparency can shift behaviours in general.

In force from 1 March 2025, qualifying entities must include information in their report about payment practices and policies in respect of retention provisions in qualifying construction contracts - including, for example, their standard payment terms, the percentage of retention deducted, the mechanisms for the release of any retention (including if it is released in stages) and whether retention policies applied to subcontractors are more onerous than those applied to higher tier contractors.

That should allow the supply chain to see what/how retention policies are applied by those qualifying entities, along with key statistical information about the extent to which those policies are applied in practice.

The regulations will shine a light on how many clients and main contractors are still "holding on for dear life" when it comes to retention cash. With the construction sector already grappling with skills shortages, material cost fluctuations and increasing regulatory demands around safety and sustainability, freeing up working capital is about business survival and resilience, as much as fairness.

So, despite these new regulations and continued scrutiny of retention as a form of performance security, there's little doubt the practice is here to stay.

As always, I’m happy to have a chat about performance security, retention, the regulations or, generally, holding on for dear life – please do get in touch.