Retention Payments Explained: The 5% Problem

You priced the job to make 5% margin. Then the contract holds back 5% of every payment, half of it for a year or more after you have finished. On paper that is a temporary deduction. In practice, for a lot of building firms, retention is their entire profit sitting in someone else's bank account, released late, shaved by deductions, or lost entirely. Here is how retentions work, why they have become indefensible, and what to offer instead.

What is a retention payment?

A retention is a slice of each payment, typically 5%, that the client or main contractor holds back as security that you will complete the work and return to fix defects. The standard mechanics: half the retention, usually 2.5% of the contract value, is released at practical completion. The remaining half is held through the defects liability period, commonly 6 or 12 months, and released once notified defects are made good.

Run the numbers on what that means. On a £200,000 contract, £10,000 of work you have already done and been certified for is withheld, £5,000 of it for a year or more after handover. You have paid the labour and the merchants' invoices in full; the retention comes straight out of your margin, interest free.

Why retentions exist

Retentions exist because clients want a financial reason for the builder to come back after handover. Once the job is done and paid, the argument goes, a builder has no incentive to return for defects, so the client keeps a slice of the money as that incentive. From the client's chair it is not an unreasonable want: defects do appear in the months after completion, and some firms really do vanish once the final invoice clears.

The problem is not the want. It is the mechanism, which makes the builder an involuntary, unsecured lender to their own client, with repayment contingent on the client's goodwill, solvency and paperwork.

The problem: late, short or never

The problem is that retention money is routinely released late, reduced by deductions the builder only hears about at release time, or lost outright when the payer becomes insolvent. Government-commissioned research in 2017 estimated that around £4.5bn is held in retentions across the construction industry in a given year, and that hundreds of millions of pounds of it had been lost to upstream insolvencies over just a few years. The collapse of Carillion in 2018 made the risk concrete: subcontractors' retentions were simply gone, queued behind every other unsecured debt.

Even when the payer stays solvent, the release dates drift. Chasing 2.5% of a contract a year after demobilising means digging out paperwork, proving defects were closed, and spending admin time you never priced. Many firms quietly write small retentions off, which is precisely what the drift relies on. And if your contract is with a residential occupier, the statutory adjudication route that commercial disputes use is not available: the Housing Grants, Construction and Regeneration Act 1996 excludes contracts with residential occupiers, so your fallback is court.

Reform pressure, but no reform

The industry has been pushing to fix retentions for years, and nothing has landed. A government consultation on retentions ran in 2017. The Aldous Bill, which proposed ring-fencing retention money in deposit protection schemes, had wide industry backing and ran out of parliamentary time. Build UK set out an ambition to move the industry to zero cash retentions by no later than 2025; the date has been and gone, and retentions remain standard practice. The direction of travel is clear, and the pace means you should not price your cash flow on waiting for it.

The alternative: funded milestones with a defined snagging release

A pre-funded milestone schedule with a defined snagging milestone gives the client everything a retention gives them, without you financing it. The structure: the project is broken into milestones, and each milestone's full value is deposited into a safeguarded escrow account before that stage starts. The final milestone is sized to cover snagging and completion, the same order of magnitude a retention would be, and releases when the snag list is signed off.

Compare the two positions. Under a retention, your 5% is in the client's account, released on their timetable, exposed to their solvency. Under a funded snagging milestone, the money sits in escrow where neither side can touch it: the client cannot spend it, you cannot draw it early, and it releases the moment the defined work is signed off, with an independent RICS assessment available if you disagree about whether it is. The client keeps a genuine assurance that completion money is tied to completion. You get a funded, date-certain release instead of an open-ended IOU. Platforms like Renopay run exactly this structure, with funds held by Online Payment Platform (OPP), a payments provider authorised by the FCA.

Retentions are one version of a wider problem: doing the work first and hoping the money follows. Our guide to protecting yourself against non-payment covers the rest of that ground, and you can see how funded milestones work for building firms at renopay.co.uk/builders.

Stop lending your margin to your clients. Join Renopay at renopay.co.uk and put your next project on funded milestones with a defined snagging release.

Frequently asked questions

What is the standard retention percentage in construction?

5% of the contract value is typical, with half released at practical completion and half at the end of the defects liability period. Some contracts use 3%, and the percentage is negotiable before signing.

When should retention money be released?

On the dates the contract sets: normally half at practical completion and the balance once the defects period ends and notified defects are made good. If release dates pass, chase in writing with the contract clauses cited; on commercial contracts, adjudication is available if the payer will not move.

Can I refuse to accept a retention clause?

You can negotiate it before the contract is signed. Realistic alternatives to offer include a defined, escrow-funded snagging milestone, a retention bond, or a reduced percentage with a fixed long-stop release date. Once the contract is signed, you are bound by its terms.