What is retention, and when do you get it back?

You finish the month, price the work, send the application. The payment comes back three or five per cent short. Nobody stole it. That is retention, and on a job worth three hundred thousand pounds it is nine to fifteen thousand of your money sitting in somebody else’s account.

It is held for one reason: security that you will come back and put defects right. That is the whole purpose. It is not a discount, it is not a deposit against the client changing his mind, and it is not a fund he can dip into because he is unhappy about something else.

Start here: retention is not in any Act

This surprises people, so it is worth saying plainly. There is no statutory right to hold retention in the UK and no statutory percentage. The Housing Grants, Construction and Regeneration Act 1996 gives you the right to be paid in stages and the right to know why a payment is short, but it says nothing about retention itself.

Retention exists only because your contract says so. Which means the answer to “how much can they hold” and “when do I get it back” is never a general rule. It is in your contract particulars, on the page most people sign without reading.

That is not a technicality to catch anybody out. It is the first thing to establish, because the percentage, the release dates and the ceiling all come from the same place, and if you cannot point at it then neither can they.

What it costs you, in money you can count

Take a job of three hundred thousand pounds. The common position on the JCT and RIBA forms is five per cent during the works, dropping to two and a half per cent once practical completion is certified. Three per cent turns up as well, so check yours rather than assuming.

At five per cent, fifteen thousand pounds comes off across the valuations. When practical completion is certified the rate halves, which releases seven and a half thousand. The remaining seven and a half sits there until the end of the defects period, commonly six or twelve months later.

So seven and a half thousand pounds of your money is out of your account for up to a year after you have finished. That is not a rounding error on a small builder’s cash flow. It is a van, or a month of wages, and it is the difference between taking the next job and turning it down.

Two things follow from that, and both are practical rather than legal:

• Price it. Retention is a financing cost. If you are not carrying it in your rates, you are lending the client money for eighteen months at nought per cent.
• Diarise it. The second half is the one that gets forgotten, because by then you have moved on and so has everybody else.

What you should actually do

Four things, in this order, and the first one takes ten minutes.

1. Read the contract particulars and write down four numbers. The retention percentage. Whether it drops after practical completion, and to what. The length of the defects period, which your contract will call the rectification period or the defects liability period. And whether there is a retention limit, meaning a ceiling above which they stop deducting. Those four decide everything else.

2. Show retention on the face of every application. Gross value of work done, less retention, net sum applied for. Not a single figure at the bottom. A client who cannot see how you got there is a client who queries it, and a query is a month of delay.

3. Know the difference between retention and a deduction. Retention comes off the valuation itself and both of you expect it. A deduction is different: if the payer wants to pay you less than the sum notified as due, he must serve a pay less notice before the deadline, and it has to state the sum he considers due and the basis on which it is calculated. That is section 111 of the 1996 Act. Money taken without that notice is not retention, whatever it is called on the certificate.

4. Ask for it in writing on the day it falls due. When practical completion is certified, the first half is due under your contract. When the defects period ends and the making good is certified, the balance is due. Once it is due and unpaid, it is simply a late payment.

What you can do about that depends on who your client is, and this catches people out more than any other point on this page.

• If your client is a business, a developer, a landlord, a company, then the debt is a commercial one and the Late Payment of Commercial Debts (Interest) Act 1998 is in play. It works by filling a gap rather than overriding your contract: where the contract already gives you a substantial remedy for late payment, meaning a real interest clause rather than a token one, that clause governs. Where your contract is silent, or what it offers is not a substantial remedy, the Act steps in with statutory interest and a fixed sum in compensation. So the first thing to check is still your own contract.
• If your client is a private individual having work done on their own home, that Act does not apply at all. It only works between businesses. What you are left with is the interest rate written into your own contract, and if there is none, there is no automatic entitlement. If it goes as far as a county court claim the court has a discretion to award interest under section 69 of the County Courts Act 1984, but that is a court awarding it, not a right you can invoke in a chasing email.

Which is a good argument for putting an interest rate in your own terms before you start, because on a domestic job it is the only one you will have. One warning that goes with that advice: a contract with a consumer is subject to the fairness test in the Consumer Rights Act 2015. A sensible rate will stand. A punitive one can be held unfair and struck out, and then you are left with nothing at all, which is worse than if you had written a modest figure in the first place.

The four ways it goes missing

• Nobody tracked the release date. By far the most common. The defects period ended eight months ago and nobody sent an email.
• The rate never dropped. Your contract halves it at practical completion, but the client’s spreadsheet did not, so the last four certificates were short.
• It was used against something else. A disputed variation, a snag, an argument about programme. That is a deduction wearing retention’s coat, and it needs a pay less notice.
• You held more from your subcontractor than was held from you. Legal in most contracts, but it is working capital you will have to give back, and it is the fastest way to lose a good groundworker.

The test that settles most arguments

Ask one question: what is the money still being held as security for?

If the works are complete, the defects have been made good and the certificate has been issued, the honest answer is nothing. Money held as security for nothing is not retention any more. It is your money, late.