Retention (Construction)

Retention is money you hold back from the contractor's progress payments as a form of security. Typically 5% of each certified amount is withheld (sometimes with a cap at 5% of the contract sum), held in two equal portions. The first half is released at practical completion; the second half is released at the end of the defects liability period.

The logic is simple: if the contractor walks off the job or refuses to fix defects, you have money to cover the cost of getting someone else to do it. Without retention, your only recourse is legal action — slow, expensive, and uncertain.

But retention is also a source of tension. Contractors see it as their money being held hostage. Subcontractors — who are often the ones doing the actual work — can be particularly affected because retention flows down the contract chain. A head contractor might hold retention from twenty subcontractors, creating significant cash flow pressure on smaller businesses.

There's been a push in Australia toward trust arrangements for retention funds (already legislated in some states), and some developers use alternative security instruments like bank guarantees instead. Whatever mechanism you use, tracking retention accurately is essential — you need to know exactly how much is held, against which contracts, and when it's due for release.