What is retention in construction accounting?

Nov 16, 2022 | Construction industry

It’s a term used all over the construction world, but what does retention mean for your business?

Retention is a percentage – usually up to 5% of the contract sum – of each payment made under a construction contract. This will be withheld to try and ensure that works under the contract are completed to the required standard.

This acts as a ‘pot’ of sorts, with the employer able to deduct charges such as damages or as a deterrent to ensure work is completed on time with minimal error. It’s like a deposit.


How do I get my retention money?

You’ve completed your job with no mistakes – where’s your retention fee, and how do you get it?

The retention may be paid back at various intervals depending on the contract. Usually, half of it will be paid on completion of the contract, with the remaining half paid after the final amendments and tidying up of the job.

There are other events – known as triggers – which, if agreed upon, will see some or all of the retention money sent over. It always pays to understand your contract before you sign it.


What can go wrong with retention?

It can be very common for retention not to be paid on time or without significant back and forth to release it. Of course, this causes cash flow headaches and issues, which can, in rare cases, lead to insolvency.

Presently, there is no regulation around retention, with an official consultation held back in 2020 regarding the practice. There is still no change in legislation, but this could change in the future.

Most businesses don’t concern themselves with retention, focusing on other means of acquiring cash, should it be needed. However, this can have repercussions on the rest of the business as a whole, and in an ideal world, it is best avoided.

This money is yours – if you’ve done the work and corrected any defects – so it should be paid to you.


Some legislation to be aware of

The ‘Construction Act’ in most cases prohibits clauses which make payment of retention conditional on the following:

  • the performance of obligations under another contract
  • a decision by any person as to whether obligations under another contract have been performed
  • the payer receiving payment from a third party.

The Construction Act states such clauses will be ineffective and will be replaced with the relevant provisions.

A condition that delays payment of the second half of a retention payment until the main contract’s defects have been corrected would no longer be valid and will be substituted by the applicable provisions of The Scheme.

Your retention money would most likely become due for payment considerably earlier than your employer anticipated as a result of this.


How can these problems be avoided?

If your employer hasn’t paid you, much like an invoice, there isn’t a lot you can do straight away.

Check your contract, contact your employer, and go back through your records to ensure you’re holding your end of the deal. Ultimately, it can be a waiting game before you enter into any legal action.


I’ve not received my retention, what do I do?

Speak to us – our expertise has helped many clients out of a tight spot with retention. We know the law, and we can help find you the right result and hopefully get you your retention.

Talk to us about retention.

Ready to go? We’re excited to hear from you.

Let’s get started, as soon as you’re ready. We’re always up for a chat about how we can support you and your business.

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