In this series, we have discussed two forms of performance security – performance bonds and parent company guarantees.

In this final part, we discuss what we consider to be the most widely utilised form of performance security - retentions; we also look at recent measures introduced in the UK to encourage transparency in retention practices in the construction industry.

At a basic level, a retention is a mechanism by which the client keeps back a certain percentage of the value of the works from payment to the contractor, until practical completion and/or the expiration of the rectification of defects period (subject to drafting). The intention of the practice is to provide security to the client by encouraging the contractor to complete the works and remedy any defects in accordance with the construction contract. It also aims to mitigate risk of contractor insolvency by ringfencing a certain amount of money that the employer can use to finalise the works should the contractor experience solvency issues.

In our experience, nearly every building contract or sub-contract includes a retention percentage. The retention figure does however vary from contract to contract, subject to the relevant project specifics and circumstances. Most standard form construction contracts tend to include a default retention percentage – typically set at 3% of the contract sum. However parties can agree on any level of retention, which we have in some instances seen being enhanced significantly in lieu of other performance security solutions.

Despite the prevalence of retentions in the construction industry, their utilisation has consistently been under the spotlight and have over recent years been increasingly scrutinised by the UK Government. A number of bills have been presented to the UK Parliament to reform retention. Examples include the Construction Industry (Protection of Cash Retentions) Bill 2017 and the Construction (Retention Deposit Schemes) Bill 2017-19 which aimed to address unfair withholding practices, financial security and mandatory deposit schemes. The Construction (Retentions Abolition) Bill 2021-22 was more recently proposed to abolish and prohibit retention clauses. However, none of these bills were passed or even progressed to a second reading.

Big name contractor insolvencies continue to bring focus to retentions (as with other forms of performance securities as outlined in our earlier two blogs here and here). On the face of it, retentions are a logical tool to ensure that works are complete in accordance with the construction contract. There are, however, well known concerns in the industry including the restrictions on cash flow (against typically low profit margins), plus in some cases unfair withholding practices and undue delays to the release of the retention amounts.

Reporting

The Reporting on Payment Practices and Performance (Amendment) Regulations 2025 (the Amended Regulations) have been introduced in an effort to bring greater transparency to retention practices for “qualifying construction contracts”. The Amended Regulations build on the existing payment practices reporting regime introduced in 2017 by way of The Reporting on Payment Practices and Performance Regulations 2017 and The Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017. The explanatory notes to the Amended Regulations explain that the payment practices reporting regime was designed to drive greater transparency and a culture change toward more fair and prompt payment. This has long been an issue in the construction sector, which is characterised by high levels of fragmentation and projects having large and disaggregated supply chains. And now the extension to retention practices tackles an issue which can be particularly problematic for small businesses in the supply chain, due to late, partial or non-payment of retentions, or these being permanently lost through upstream insolvency.

Under the Amended Regulations in force from 1 March 2025, qualifying entities must include information in their report about payment practices and policies in respect of retention provisions in qualifying construction contracts they have entered into. This includes, for example, their standard payment terms, the percentage of retentions deducted, the mechanisms utilised for the release of any retentions (including whether it is released in stages) and whether retention policies applied to subcontractors are more onerous than those applied to higher tier contractors. This will provide those in the supply chain with details about standard retention policies applied by qualifying entities, along with key statistical information about the extent to which those policies are applied in practice. More detail on who the Amended Regulations apply to, what is a “qualifying construction contract” and the extended reporting requirements can be found in the 2017 Regulations here and here.

Comments

Despite the tightening of reporting requirements introduced and the continued scrutiny of retentions, our experience is that retentions are here to stay and will continue to be utilised as an effective method of performance security. However, the reality of some practices of retention release and the impact on cash flow are genuine concerns for contractors. It remains to be seen if the tightening of retention practices prompts a shift in practice.

If you are considering the use of performance security in your construction contract or require any advice in relation to retention reporting requirements, please be in touch with a member of our construction and projects team.

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