Retention clauses have their origin in the Victorian Railway “Boom” when over £3bn was spent on the building of railways and provision of stock. The concept was that employers would protect themselves from contractor default by retaining funds. Like parts of the railways, retentions were said to be in need of abolition in the 1960’s (the Banwell Report of 1964). Unlike the railways, retentions were not even curtailed at that time.
Retentions, perhaps for those historical reasons and perhaps as a result of a common sense view as to the holding back of money, have been regarded as an employer’s security (see Keating on Construction Contracts 12th Edition paragraph 11-027; Hudson’s Building and Engineering Contracts 14th Edition paragraph 3-069) and as “an assurance of project completion and as a safeguard against defects which may subsequently develop and which the contractor may fail to remedy.” (BEIS Research Paper 17). Thus, a retention, although usually a low percentage, may be held under until completion of the works (see Hoenig v Isaacs [1952] 2 All E.R. 176 at 181) and be paid as part of the final instalment. Making good of all defects can be a condition precedent to the release of the instalment containing the retention – see Hudson supra.
A retention may, however, also be a benefit to contractors. Tier 1 contracts may use the retention as working capital (see paragraph 4.3.1 BEIS Research Paper 17). It may also be that retentions are the least bad option in response to the ancient and continuing questions of contractor default – real, imagined or created (see below for a discussion of the other responses).
For these reasons, retentions currently find themselves in the standard form contracts (clauses 4.17 – 4.19 of the JCT Standard Building Contract; 4.16 – 4.18 of the JCT Design and Build Contract and in NEC3 and NEC4 as options). As indicated, the percentage retention is usually low: the JCT uses 3 or 5%.
All of that may be about to change. On 24 March 2026, the government issued a press release. This was in response to the July 2025 consultation in which 53% of those that responded favoured abolition of the retention. Thus, as can be seen and as part of a package of wider measures, the retention is to be abolished – or rather phased out over a period of 12 – 24 months.
Unsurprisingly, the announcement has triggered a fair amount of comment. Retentions are, after all, a fact of construction life and were not substantively eroded by the processes put into place by the Housing Grants, Construction and Regeneration Act and subsequently refined. So, what does the abolition of retention mean? Or more accurately, what will be the results?
Even though the form of the legislation is not published, we would suggest little turns on that. After all, abolition is abolition. What will be more interesting is how the construction industry responds.
For contractors little may change. Retentions are included in the payment processes such that if a retention is not paid and there is no proper withholding as per the process, then the contractor can claim the retention element then due in adjudication. To the extent, therefore, that there are issues over retention, the contractor already has remedies – including the “smash and grab” option if otherwise available.
The position is different for employers. It is reasonable to expect employers to protect against contractor default in different ways. Two are already used. On large scale infrastructure, some employers have already moved away from retentions altogether preferring to adopt a “cooperative team” approach to the project. Other employers, for example utilities, use a retention bond. As to those, on smaller projects, employers may have neither the expertise nor the personnel to administer the cooperative team approach. It is reasonable, however, to expect all employers to have greater resort to bonds and guarantees assuming the former is not too costly and the latter is available and has any force (the employer having carried out the requisite due diligence). Whether contractors (or their parent companies) will agree to such bonds or guarantees would obviously be an interesting debate in contractual negotiations.
Three other approaches are possible.
The first is a greater use of warranties and indemnities as against the contractor and down the contractual chain. Those warranties and indemnities could extend to periods during construction, the rectification period and thereafter. Careful drafting could allow for smash and grab type claims under the warranties and indemnities and for a rolling, continuous obligation (which could extend limitation). Whether more onerous drafting would be acceptable to contractors or would be passed over as the price of then doing business perhaps triggering later sellers’ remorse, remains to be seen.
The second approach is a more proactive use of adjudication by employers. Employers could, for example, monitor construction processes closely for defects/delay, engage experts and then have their own rapid defects/delay adjudication which would then, if successful, be temporarily binding. This route would, in effect, replicate the retention albeit in a quantified and specified way until any final “true value” adjudication. There may be benefits to both parties in this approach – temporarily binding certainty at least. There are, however, the perennial questions associated with adjudication and an issue as to whether the question of defective performance is simply being postponed to the “true value” assessment.
The third approach is altering the payment mechanism to allow for early payment bonuses to be generated, from the contract price, for early or exceptional performance. In colloquial terms, as the net cost/payment remains the same, contractors would then have to decide whether they wished for jam today but no jam tomorrow.
Thus, although retention may be abolished, the questions of true or imagined contractor default and the employer’s prospective and retrospective responses to that position will remain.
