What Is Retention?

Retention is usually expressed as a percentage of each progress claim, deducted before payment is made, and it keeps accruing claim by claim until it reaches an agreed cap. A typical structure:

• Percentage per claim — commonly around 5% of the value of each progress payment, though the figure is set by the contract and varies by project type and risk.
• Overall cap — retention usually stops accruing once it reaches a set percentage of the total contract sum, often also around 5%.
• Retention trust accounts — in some Australian states, retention above a threshold on eligible projects must be held in a separate trust account for the contractor’s protection.
• Retention bonds or bank guarantees — many contracts allow the contractor to substitute a bond or guarantee for cash retention, improving cash flow during the build.

Retention is released in stages tied to contractual milestones, not all at once at the very end of the job. The most common structure splits it in two: half (or another agreed proportion) is released at practical completion, when the works are fit for use apart from minor outstanding items, and the balance is released at the end of the defects liability period, once any defects identified during that period have been rectified.

The defects liability period itself is commonly around 12 months from practical completion, though it varies by contract and project type. Some contracts release retention in more than two tranches, or tie partial release to specific milestones such as the completion of particular trades or sections of the works — the release schedule is always set out in the contract, so it is worth checking rather than assuming a standard split applies.

Retention is one of several tools a client can use to secure a contractor’s performance, and contracts sometimes combine more than one. A performance bond or bank guarantee provides similar security without touching the contractor’s cash flow during the job, since it is arranged with a bank or surety rather than deducted from payments.

Because retention directly reduces cash in hand during construction — often at the point in a job when cash flow is already tightest — many contractors prefer to negotiate a bond or guarantee instead, where the contract and the client’s risk appetite allow it. Larger, well-capitalised contractors more commonly secure this substitution than smaller subcontractors, who are more often the ones retention is withheld from.

• Cash retention — withheld from progress payments, released at agreed milestones.
• Retention bond or bank guarantee — a third party stands behind the contractor’s performance instead of cash being withheld.
• Performance bond — broader security, often used on larger projects, covering performance generally rather than just defects.

Because retention is deducted from money already earned, it has an outsized effect on a contractor’s cash flow — every claim pays out slightly less than the work is worth, and the shortfall is only recovered much later, at practical completion and again after the defects liability period. For subcontractors carrying retention across several head contracts at once, this can tie up a meaningful slice of working capital for the better part of a year or more.

Good practice is to track retention on every job explicitly — how much has been withheld, when each release is due, and what conditions (such as a defects list being closed out) must be met first — rather than treating it as an afterthought once the final account is settled. Chasing a retention release six months after it was due is far harder than tracking it against the contract from day one.

Retention typically flows down the contract chain: a client withholds retention from the head contractor, and the head contractor in turn commonly withholds retention from subcontractors on the same basis. Each party in the chain is entitled to have retention held fairly and released on time under their own contract, regardless of what is happening further up the chain.

In several Australian states, security of payment and retention trust account legislation now requires retention above a threshold on eligible projects to be held in a separate trust account, specifically to protect subcontractors if a head contractor becomes insolvent before releasing retention that is properly due. The detail differs by state, so it is worth checking the current rules where the project is located.

Retention is often mentioned in the same breath as other end-of-job contract mechanisms, but each serves a different purpose:

• Retention vs liquidated damages — retention secures completion and defect rectification; liquidated damages are a pre-agreed daily rate charged if the contractor finishes late, and are a separate deduction entirely.
• Retention vs the defects liability period — the defects liability period is the timeframe during which defects must be rectified; retention is the financial security held over that same period.
• Retention vs a variation — a variation changes the scope and price of the works; retention is a payment security mechanism, unaffected by whether variations have occurred.

Retention disputes are common, and most come back to a small set of avoidable issues:

• Not checking the contract’s retention percentage and cap before pricing the job, which can understate the cash flow impact of a large contract.
• Losing track of how much retention has been withheld across multiple progress claims, making the final reconciliation harder than it needs to be.
• Missing the practical completion or defects liability period milestones that trigger release, so money that is due sits unclaimed.
• Not knowing whether a retention trust account applies on a given project, and failing to check that retention is actually protected as required.