Retention bonds explained
A retention bond lets a contractor get paid in full while still giving the client security against defects. Here is how retentions work, what a bond changes, and when it makes sense.
What a retention is
In most UK construction contracts the paying party keeps back a percentage of each interim payment. That money, the retention, is security: if the work turns out to be defective and the contractor does not fix it, the client can use the money to pay someone else to.
The retention is usually released in two halves. The first half is paid when the work reaches practical completion. The second is paid at the end of the defects period, often twelve months later, once any defects have been put right.
The rate is set in the contract. Of the 815 large companies whose latest payment report says their construction contracts include retentions, the typical standard rate filed is 5%. See every company and its rate.
Why retentions are a problem for subcontractors
The money held back belongs to the contractor, but the contractor cannot use it. On a large job a few per cent of every payment adds up to a lot of working capital. Release often depends on events the subcontractor does not control, such as the whole project reaching completion, so specialist trades who finish early can wait years. If the business holding the money becomes insolvent, the retention is usually lost, because cash retentions are not normally kept in a separate trust account.
The government consulted on these problems in its 2017 consultation on retention payments in the construction industry, which set out options including retention bonds and holding retentions in protected accounts.
What a retention bond is
A retention bond replaces the cash. Instead of the client keeping back a percentage of each payment, the contractor is paid in full and arranges for a bank or insurer, called a surety, to give the client a bond for the same amount. If the contractor fails to put defects right, the client can claim against the bond rather than dipping into retained cash.
- The contractor pays the surety a premium for the bond, and gets its cash flow back.
- The client keeps the same security, without holding the contractor's money.
- The surety takes the risk, and will look at the contractor's accounts before agreeing to issue the bond.
Standard form contracts used in the UK can provide for a retention bond in place of a cash retention, but only if the parties choose that option when the contract is agreed. It is far easier to ask for one at tender stage than once work has started.
When a bond makes sense
- When the retention held across your jobs is large compared with your working capital.
- When the premium costs less than borrowing the same amount, or less than the work you could take on with that cash.
- When the client accepts it. Some clients refuse, and a bond still has to be in place until the defects period ends.
Your rights on payment more generally
Part II of the Housing Grants, Construction and Regeneration Act 1996, usually called the Construction Act, gives parties to construction contracts a right to interim payments, notices saying what will be paid, a right to suspend work for non-payment and a right to adjudication. Section 113 makes "pay when paid" clauses ineffective except where a party further up the chain is insolvent. Our fair payment charter sets out what good practice looks like beyond the legal minimum.
This page is general information, not legal advice. Take advice on a specific contract.