Retention money

What it means

Retention money is the part of the price of works the client holds back until defects are fixed or the warranty expires. It is common in construction and technology supply.

It is neither a discount nor a penalty but a deferred part of the price. In the books it stays a receivable due under the contract, not an immediate reduction of revenue.

Retention is security, not a reward for the client. If the contractor remedies the defects, the client must release it in full. If not, the client may use it to pay for repairs by a third party or set off a contractual penalty against it, but only to the extent and in the way the contract expressly allows.

How it works in practice

The percentage and period belong in the contract with a clear release trigger: the handover protocol, the end of the warranty, defects remedied. Otherwise money is released when someone remembers.

A quality bank guarantee is the alternative: the client is protected and the contractor is paid in full at once. With long warranties it costs less than tied-up cash.

The VAT liability usually arises when the work is delivered, not when it is paid. The contractor therefore pays tax on the part of the price it will only receive once the warranty ends. On larger jobs we build this into the client’s cash flow plan in advance, so paying tax on money not yet received comes as no surprise.

What to watch out for

Retention slips out of sight: it hangs in the sub-ledger for years as an unpaid invoice that nobody chases. So it is tracked separately, with a release date and an owner.

Retention is subject to limitation like any other receivable. The period runs from the date the contract says it should have been released, not from when the contractor remembers it. Waiting for the client to get in touch can cost the claim entirely, leaving nothing but a write-off.