What retention and a retention guarantee are
Many construction contracts allow the employer to withhold a percentage of each interim payment as retention. The money is held as security that the contractor will complete the work and put right any defects, and is released in stages as the contract specifies.
For contractors, retention is a drag on cash flow, particularly on long contracts. A retention guarantee is a way of replacing the cash with a guarantee from a guarantee provider, so that the contractor receives the money earlier, while the employer keeps its security.
When a retention guarantee comes up
- Contractors on long contracts where retention builds up to a substantial sum.
- Contractors with tight cash flow who are comparing the cost of a guarantee with the cost of waiting for retention to be released.
- Contractors whose contract expressly states that retention can be replaced by security.
- Subcontractors who want to apply the same mechanism to retention held by the main contractor, where the subcontract permits.
What to check
- The retention clause
- What percentage is retained, what the cap is, when it is released and whether a guarantee can replace it.
- The employer’s acceptance
- Even where the contract allows substitution, the employer may need to agree to the form of guarantee and the issuer.
- Wording
- The guarantee must match the contract’s requirements for amount, expiry and release. Mismatched wording is a common reason for rejection.
- Release of the cash
- Confirm how and when previously retained amounts are released once the guarantee is delivered, and the effect on future payment certificates.
- Defects period
- If retention also secures the defects liability period, check that the guarantee’s expiry matches that period.
Important limitations and obligations
- Cost and security
- The guarantee has a cost, and the provider may require security or an indemnity. Compare these with the benefit of earlier access to cash.
- Repayment
- If the guarantee is called, the provider is normally entitled to reimbursement from the contractor under its counter-indemnity.
- Provider limits
- Using capacity for a retention guarantee may affect what is available for other guarantees.
- Not guaranteed
- Placement depends on the provider’s approval. We cannot promise an outcome or a timetable.
Cash retention and a retention guarantee compared
| Point | Cash retention | Retention guarantee |
|---|---|---|
| Who holds the security | The employer, as money held back from payments | The guarantee provider, through its undertaking to the employer |
| Effect on cash flow | Contractor is paid less until release | Contractor may receive more earlier, if the employer accepts |
| Cost to the contractor | Delayed access to money | Cost of the guarantee, plus any security or indemnity |
| Risk if the contractor defaults | The employer keeps the cash | The employer may call the guarantee, and the contractor reimburses the provider |
| Dependence on employer’s agreement | Applies under the contract | Depends on the contract and on the employer’s acceptance |
Information we usually need for a quotation
To explore a retention guarantee we would normally ask for:
- The retention clause and any provision for substituting security.
- The retention percentage, the amount held to date and the expected release dates.
- The employer’s name and any prescribed wording.
- Your business and director details and recent financial statements.
- A summary of the project and its progress.
- Details of other guarantees or security already in place.
You do not need everything on day one. A short description of the work is enough to start, and the quote form only asks for the details relevant to your enquiry.
Frequently asked questions
Does every contract allow retention to be replaced by a guarantee?
No. Some contracts allow it, some leave it to the employer and some do not permit it. Check the retention clause and ask the employer.
Will the employer release my retention immediately?
Not necessarily. The timing depends on the contract and on the employer’s processes. Confirm the process before relying on the cash.
Is this the same as a performance guarantee?
No. A retention guarantee replaces cash retention. A performance guarantee secures performance of the contract. Some contracts have both.
Related cover
- Construction guaranteesOverview of bid, performance, advance payment and retention guarantees, and how to start a qualification enquiry.
- Performance guaranteesHow performance guarantees work, what to check in the wording, and what the application and assessment involve.
- Advance payment guaranteesHow advance payment guarantees secure an employer’s up-front payment and what to check before accepting one.
- Bid bondsWhat bid security is, when tenders ask for it and what to check before you submit.
Related guides
- Performance guarantee vs insurance explainedThe commercial difference between a performance guarantee and insurance, who benefits, who ultimately pays and the repayment obligations contractors accept.
- Latent defects explained for contractorsWhat latent defects are, how they differ from patent defects, how liability may continue after the defects period and why insurance does not automatically cover them.