Retentions in construction: how they work and your rights

Understanding Retention in Construction

In the UK construction industry, retention is a common practice where a percentage of a subcontractor's payment, typically between 3% to 5%, is withheld until certain conditions are met. This sum is retained by the main contractor as a form of security to ensure that any defects arising in the construction work during the defects liability period are promptly addressed. The retention serves as a financial incentive for subcontractors to return and rectify any issues that might manifest after the main construction phase is concluded.

The Typical Retention Cycle

The retention cycle commences at the point of practical completion, which is when the vast majority of the construction work is deemed finished and fit for its intended purpose. At this stage, a specified portion of the payments due to the subcontractor is withheld. This retention money is kept until the end of the defects liability period, which is commonly set to last between 6 to 12 months depending on the terms agreed in the contract. During this period, any defects that emerge must be addressed by the subcontractor. Upon satisfactory completion of any necessary remedial work, the retained amount should be released. If defects remain unresolved, the retention can be used to fund the necessary corrections.

Why Retentions are Used

Main contractors utilise retentions as a method to safeguard themselves against potential defects in the work completed by subcontractors. Essentially, it acts as a financial insurance, ensuring that any defects identified during the liability period are properly rectified without additional cost to the main contractor. This practice is particularly important in large-scale construction projects, where the complexity and scale can lead to unforeseen issues arising after initial completion. By withholding a portion of the payment, main contractors maintain leverage to ensure that subcontractors fulfill their obligations in terms of quality and durability of their work.

Challenges and Issues with Retentions

While retentions serve a protective role for main contractors, they can present significant challenges for subcontractors. One of the primary issues is the potential for insolvency of the main contractor. If the main contractor goes bankrupt, subcontractors may find it difficult or impossible to recover the retention money owed to them. Additionally, some main contractors may unfairly withhold retentions beyond the agreed period, which can severely impact the cash flow of subcontractors, especially smaller businesses that rely on timely payments to cover their operational costs.

Furthermore, the administration involved in managing retentions can be cumbersome, with subcontractors needing to keep meticulous records of the amounts due and the corresponding due dates for release. In some cases, disputes may arise over what constitutes satisfactory completion of remedial work, leading to further delays in payment. This can create an adversarial relationship between the main contractor and subcontractors, which is detrimental to ongoing business relationships.

Your Rights Under the HGCRA 1996

The Housing Grants, Construction and Regeneration Act 1996 (HGCRA) provides crucial protections for subcontractors in the construction industry. Under this legislation, subcontractors are entitled to be paid according to the payment schedule that has been agreed upon in the contract. If payment is not made as stipulated, subcontractors have the right to suspend work until the issue is resolved. This legal framework also facilitates the resolution of disputes through adjudication, providing a relatively quick and cost-effective method for settling payment disputes compared to traditional litigation.

The HGCRA aims to ensure fair and prompt payment practices in the construction industry, recognising the importance of cash flow to subcontractors. By having clear rights and processes for dispute resolution, subcontractors are better equipped to protect themselves against unfair practices and ensure they receive the payments they are due.

The Construction Act and Payment Notices

The Construction Act mandates that payment notices must be issued within a specific timeframe, typically 28 days from the due date. This requirement is designed to promote transparency and accountability in the payment process. If a main contractor intends to pay less than the amount specified in the payment notice, they must issue a pay less notice. This document must clearly outline the reasons for the reduction and the basis of its calculation.

Understanding these provisions is essential for subcontractors. It empowers them to challenge any discrepancies in payments and ensures that they can effectively manage their financial planning. Familiarising oneself with the Construction Act's requirements provides subcontractors with a framework to safeguard their rights and maintain a stable financial footing.

Retention Reform

There has been ongoing debate regarding the reform of retention practices in the UK construction industry. While many industry stakeholders have advocated for a mandatory retention deposit scheme, such measures have not been enacted into law as of 2026. The government continues to explore various options to protect subcontractors without imposing overly prescriptive regulations on the management of retentions.

One of the proposals under consideration is the establishment of a trust fund or escrow account where retention monies would be held independently of the main contractor's finances. This would provide a safeguard against the risk of main contractor insolvency, ensuring that subcontractors can access their retained payments even if the main contractor encounters financial difficulties. While such reforms have not been implemented, the ongoing discussions highlight the need for a balanced approach that protects the interests of subcontractors while acknowledging the legitimate concerns of main contractors.

Actions When Your Retention Isn't Released

If you find yourself in a situation where a main contractor fails to release your retention, there are several steps you can take to address the issue. Initially, it is important to send a formal demand for payment, outlining the details of the retention and the agreed release date. This formal communication serves as a record of your request for payment and can be used in any subsequent dispute resolution processes.

In addition to sending a formal demand, you may be entitled to charge interest on the outstanding amount under the Late Payment of Commercial Debts (Interest) Act 1998. This legislation allows businesses to claim interest on overdue payments, providing an additional financial incentive for the main contractor to release the retention promptly.

If these measures do not result in payment, you may need to escalate the issue through adjudication. This process involves appointing an independent adjudicator to review the dispute and make a binding decision. Adjudication is a relatively quick and cost-effective method for resolving payment disputes, making it an attractive option for subcontractors seeking to recover their retentions.

Reducing Retention Risks

There are several proactive steps subcontractors can take to reduce the risks associated with retentions. First and foremost, it is essential to ensure that all contracts are in writing and clearly outline the terms of retention, including the percentage withheld, the defects liability period, and the conditions for release. Having a clear contractual agreement helps to prevent misunderstandings and provides a basis for resolving any disputes that may arise.

Additionally, it is advisable to agree on a detailed defects list with set deadlines for rectification. By having a clear understanding of the specific defects that need to be addressed and the timeframe for doing so, subcontractors can ensure that they meet their obligations and facilitate the timely release of their retention.

Subcontractors should also be proactive in responding to snagging issues as they arise. Promptly addressing any defects or issues demonstrates a commitment to quality and can help to maintain a positive relationship with the main contractor. This proactive approach can also reduce the likelihood of disputes and delays in the release of retention payments.

Retention Tracking Checklist

1. Record all retention amounts in your contracts. Ensure that each contract clearly specifies the percentage of retention, the conditions for its release, and any applicable deadlines.
2. Keep track of each retention's due date. Maintain a schedule of retention release dates to ensure that you are aware of when each payment is due.
3. Follow up as due dates approach. Reach out to the main contractor to confirm the status of your retention and address any potential issues before the due date.

Utilise available resources such as the Late Payment Calculator to calculate interest on overdue payments. This can provide an additional financial incentive for main contractors to release retentions promptly. For further guidance on handling non-paying clients, refer to our comprehensive guide.

For more detailed information on retentions and related issues, consult official resources such as gov.uk and industry bodies like Build UK.

FAQ

• What is a retention in construction?

  It's a percentage of the payment held back by the main contractor to ensure any defects are addressed during a set period.

• How long is the defects liability period?

  It typically ranges from 6 to 12 months.

• Can subcontractors refuse to work if not paid?

  Yes, under the HGCRA, subcontractors can suspend work if payments are not made as agreed.

• Are retention deposit schemes mandatory?

  No, as of 2026, they are not mandated by law, but discussions continue.

• What steps can I take if my retention isn't released?

  Send a formal demand, charge interest under the Late Payment Act, and consider adjudication if necessary.

• How can I reduce the risks associated with retentions?

  Ensure clear written contracts, agree on a defects list with deadlines, and respond promptly to snagging issues.