What are retentions in construction?
Retentions are part of each payment held back until the work is finished and the defects period has ended.
Retentions are money held back from each payment on a construction contract, as security against defects or unfinished work. The paying party keeps a percentage of every valuation and releases it in stages, part at practical completion and the rest at the end of the defects period. Main contractors retain from their subcontractors in the same way.
Retentions run through almost every contract chain. A client retains from the main contractor, who retains from subcontractors, so most contractors are owed retention money and holding someone else's at the same time. Tracking both sides is a finance job as much as a commercial one, which is why construction accounting software treats retentions as part of billing rather than a note in a spreadsheet.
How do retentions work?
Retention is set in the contract as a percentage of the value of work done. It then follows the life of the contract:
- Deducted at each valuation. When an application for payment is valued or certified, the retention percentage comes off the gross value before payment.
- Built up over the contract. The amount held grows with every valuation, up to any limit the contract sets.
- First release at practical completion. Part of the retention is paid when the works are finished and handed over.
- Final release after the defects period. The balance is paid once the defects period ends and any defects have been put right.
Each release has to be claimed and chased, and that's where most retention money goes missing.
What's the difference between retentions held and retentions owed?
Retentions owed to you are the money clients are holding back from your payments. Retentions held are what you're keeping back from your own subcontractors. Both have release dates, so a contractor needs to see them side by side, contract by contract, to know its real cash position.
Why do retentions matter so much to contractors?
Retention money is margin the contractor has already earned but can't spend. On low-margin work, an unpaid retention can wipe out the profit on the whole job. Specialist subcontractors feel this most, because they sit at the end of the payment chain.
Retentions are also easy to lose track of. Releases fall due long after the job has finished, often after the QS who ran it has moved on. That's why finance teams report WIP and retentions alongside cash and aged debt instead of leaving them to the commercial team.
What are the alternatives to cash retention?
A retention bond replaces cash retention with a guarantee from a bank or insurer. The contractor is paid in full at each valuation, and the client still has security if defects aren't put right. The bond has a cost, so it suits contractors whose retention balance is tying up enough cash to matter.
How does Eque2 handle retentions?
Eque2 tracks retentions against each contract as part of the billing workflow. In Construct, applications for payment, sales invoices, retentions and outstanding payments sit against live contracts, so finance sees what has been claimed and what is still owed. On the subcontractor side, retentions sit alongside applications, part payments, CIS and outstanding liabilities on each subcontractor account.
Construct Insights includes a retentions dashboard across every contract, so release dates don't depend on someone remembering them.
FAQs: retentions
When is retention money released?
Retention is usually released in two stages. The first part is due at practical completion, when the works are finished and handed over. The balance follows at the end of the defects period, once any defects have been put right. The contract sets the exact proportions and dates, so check its payment terms before applying.
Do you have to apply for a retention release?
Usually, yes. A retention release is normally claimed through an application for payment or an invoice, and money that isn't claimed tends not to be paid. Diary both release dates when the contract is signed, and keep evidence that defects have been put right ready for the final release.
Are retentions included in a CVR?
Value in a CVR is normally the gross value of work done, before retention comes off, because retention is money earned but held back. Retentions owed and held are then tracked separately, so the CVR shows the true margin while the cash position shows what the business can actually spend.
About Eque2
Eque2 is the commercial and finance platform for construction, trusted by over 3,000 construction businesses. Construct brings job costing and contract management to the Sage or Xero accounts a contractor already runs. Evision runs construction commercial and finance management for larger contractors and housebuilders on Microsoft Dynamics 365 Business Central.
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