Retention money clause: holding back part of a progress claim

Sample clause

an electrical subcontract between Vergen Electrical and Kaldor Construct on a two stage warehouse project in Western Sydney

8. Retention 8.1 Kaldor Construct may retain five per cent (5%) of the amount certified in each progress claim, until the total retained reaches five per cent (5%) of the Subcontract Sum. 8.2 Retention money is security for the performance of the Subcontract Works and for the rectification of Defects, and for no other purpose. 8.3 Fifty per cent (50%) of the retention money must be released to Vergen Electrical within fifteen (15) business days after the Date of Practical Completion of the Subcontract Works. 8.4 The balance must be released within fifteen (15) business days after the end of the Defects Liability Period, less any amount Kaldor Construct has properly applied under clause 8.5. 8.5 Kaldor Construct may apply retention money to the cost of rectifying a Defect only if it has given Vergen Electrical written notice of the Defect, a reasonable opportunity to rectify it, and written notice of the amount to be applied. 8.6 Vergen Electrical may substitute an unconditional bank guarantee for the retention money at any time.

Sample wording, not legal advice.

Variants

What to negotiate

• The percentage and the cap

  Five per cent of each claim capped at five per cent of the contract sum is the common shape, with ten per cent of each claim to a five per cent limit also seen. Subcontractors push for the cap to be stated explicitly, because a clause that retains a percentage of every claim without a limit keeps growing with variations.

• Release triggers

  Half at practical completion and half at the end of the defects period is the standard split. The negotiation is about what practical completion means and who declares it. Subcontractors ask for a deemed date if no notice is issued within a stated period, since the most common reason retention is not released is that nobody signed the certificate.

• What the money may be used for

  Head contractors sometimes draft retention as security for any obligation, which lets it answer a general claim. Subcontractors limit it to rectification of defects and completion of the works, with notice and an opportunity to rectify first. Tying the money to a named purpose is what makes a later deduction reviewable.

The risk of leaving it out

With no retention clause a head contractor holding money back has no contractual basis for it, so the deduction is simply an underpayment that can be pursued as a debt or through a statutory payment claim. From the other direction, a head contractor without retention carries the cost of rectifying a subcontractor's defects itself, and its only security is a claim against a business that may already have moved on.

Security of payment and trust account rules

Construction payments sit inside a statutory framework as well as a contract. Each state and territory has security of payment legislation giving a contractor a route to a progress payment on short timeframes, and several jurisdictions add rules about how retained money is held, including trust account requirements on larger projects and reporting obligations to the regulator. A retention clause has to be read beside that legislation, because wording that would delay or bar a payment claim will not necessarily work, and a clause that is silent about a mandatory trust account does not remove the obligation.

Common mistakes

The clause holds a percentage of every claim and never states a maximum. It ties release to a defects liability period that starts on a date the contract never defines. It allows the head contractor to apply retention without notifying the subcontractor, which turns a security into a self help remedy. And it ignores interest, so money sits for a year with no one saying who earns the benefit of it.

Where it sits in a generated document

Retention belongs in the payment section of a subcontract, immediately after progress claims, and it needs the defects liability period defined before it is used. A generated subcontract numbers every clause, so the release triggers can point at the practical completion clause by number instead of restating it. Dates and percentages are written into the document as content, so the executed copy carries the same figures the parties agreed.

Documents that carry this clause

Subcontractor agreement template that flows the head contract downA subcontract exists to pass the head contract's obligations down one level and move the money back up on time. This one names the scope by drawing, sets the progress claim dates against the security of payment rules, holds retention and states the insurances, so the trade knows exactly when it is paid and for what.Payment scheduleA $184,800 fit out is paid in six milestones, and every one of them is a piece of work rather than a date. The running balance column is the part both sides check, because it falls to zero only when the handover pack changes hands.Project charter template with the scope in and out on one pageA charter exists so that a project starts with a sponsor's signature on a page that says what it is and is not. This one fits a system rollout on three pages: a measurable objective, scope in and out as two lists side by side, the team with their authority, a $341,000 budget, five milestones on a timeline and the five risks worth naming on day one.

Questions people ask