A retention clause in a building contract allows the contractor to retain (hold back) a percentage of payment until the work is completed and defects are rectified. On the surface, this protects you: the contractor finishes the job before getting their final payment. In practice, retention clauses are often unfair: they're used to retain excessive percentages, for indefinite periods, or without interest. If the contractor goes bust, your retained funds may be unsecured creditor claims. Understanding retention protections is crucial.
What is a Retention Clause?
A retention clause specifies that a percentage of each progress payment (typically 5-10%) is withheld until practical completion of the work, and a further percentage (5-10%) is held for an additional 'defects liability period' (usually 12 months). So on a £100,000 contract, you might withhold £5,000 per month during work and hold back another 5% after completion. The purpose is to incentivize the contractor to finish on time and fix defects. However, the amount retained and the period must be reasonable.
Red flags to watch for
Standard practice is 5-10%. Retention above 10% is excessive and may be unenforceable as a penalty clause.
12 months is standard. Longer periods leave your money tied up indefinitely and may be unenforceable.
Contractors should pay interest on retained funds (typically base rate + margin). Interest-free retention is unfair.
Retention is meant to incentivize quality. A clause allowing retention regardless of defects defeats the purpose and may be unenforceable.
The contract must specify when retention is released (practical completion, defects liability period end, etc.). Open-ended retention is problematic.
If the contractor goes into administration, retained funds may not be privileged and could be seized by creditors. This is standard but worth confirming with insurance.
Your legal rights
Under UK law, retention clauses must be reasonable and not penalties. The Late Payment of Commercial Debts (Interest) Act 1998 provides statutory interest rights on commercial debts, including retained funds. However, this is often overridden by express contract terms. The Construction Contracts Act 1996 (applicable to construction contracts) provides some protections: it requires payment terms to be clear and just, and it protects against excessive retention. Under the Unfair Terms in Consumer Contracts Regulations 1999, if you're a consumer, retention terms must be fair and not create a significant imbalance of rights.
Questions to ask before you sign
- 1What percentage of each progress payment will be retained until practical completion?
- 2What percentage will be retained during the defects liability period, and how long is that period?
- 3When are retained funds released, and what are the conditions for release?
- 4Will retained funds earn interest, and at what rate?
- 5What happens to retained funds if you become insolvent during the project?
- 6Can retention be released early if work is completed to specification and no defects are present?
Disclaimer: This guide is for educational purposes only and does not constitute legal advice. Contract law varies by jurisdiction and individual circumstances. Always consult a qualified legal professional before making decisions based on this information.