Recovering Disputed Retention Under a Construction Contract

Retention is one of the most argued-about practices in UK construction. The concept is simple: an employer withholds a percentage of each payment — typically 3% or 5% — as security against defects and non-performance. Half is released at practical completion; the rest at the end of the defects liability period when defects have been made good. In theory, it’s reasonable. In practice, it has become a systemic source of disputes, late payment, and financial loss — particularly when the party holding the retention becomes insolvent.

This guide covers how retention works under JCT and NEC, why employers withhold it wrongly, what you can do about it, and how to use adjudication to recover it.

Why Retention Exists — and Why It’s Controversial

The rationale for retention is straightforward: a contractor who has been paid in full has less incentive to return and fix defects. Retention gives the employer leverage to ensure the contractor comes back during the rectification period and attends to snagging. Without it, the argument goes, employers would have no practical remedy if a contractor went bust or simply refused to remedy defects — at least not without expensive litigation.

The criticism of retention is equally straightforward: it is, effectively, an interest-free loan by contractors and subcontractors to employers and main contractors. The total value of retention held in UK construction at any one time is estimated in the hundreds of millions. The contractor who has completed the works, has been certified for practical completion, and is owed the first moiety of retention still has to wait weeks or months for payment — and if the employer becomes insolvent in the meantime, that retention money is an unsecured debt. It is gone. This has happened to countless subcontractors.

Reform has been discussed for years. The Building Safety Act 2022 includes provisions at s.131 for a retention deposit scheme — a mechanism by which retention money would be held in a ringfenced deposit account rather than remaining in the employer’s general funds. As of March 2026, these provisions are not yet in force. The scheme has been the subject of pilot work and consultation, but it remains an aspiration rather than a legal reality. Until it comes into force, the position for contractors is as it has always been: retention sits in the employer’s accounts, unsecured.

Retention Under JCT Standard Building Contract

Under JCT SBC 2016, retention is governed by clauses 4.18–4.19. The retention percentage is set in the Contract Particulars — 3% is the JCT default, though 5% is still seen on some projects. The contract sum builds up a “retention fund” as interim valuations proceed, with the retention deducted from each interim payment.

Clause 4.18.3 contains the provision that has generated the most litigation: the employer holds the retention as trustee for the contractor. The language is clear. The contractor has a beneficial interest in the retention monies. But courts have historically been reluctant to enforce this as a genuine trust obligation requiring separate banking. In PC Harrington Contractors Ltd v Tyroddy Construction Ltd, the court declined to treat the retention as held in trust in circumstances where no separate account had been maintained, and the funds had effectively been mixed with the employer’s own money. The lesson: the trust language in JCT exists, but unless you take active steps to require a separate retention account, it may not protect you in insolvency.

Practical completion releases the first moiety — half of the total retention held. Under the standard JCT SBC, the contractor is entitled to this release upon issue of the Practical Completion Certificate. The second moiety is released upon issue of the Certificate of Making Good — the certificate under clause 2.39 confirming that defects appearing during the Rectification Period have been made good. The Rectification Period is typically 12 months from practical completion, though it can be amended in the Contract Particulars.

Retention Under NEC4 with Option X16

NEC4 deals with retention through Option X16, which must be specifically incorporated. If X16 is not included in the contract data, there is no retention. If it is included, the contract data specifies the retention percentage and the retention free amount — the value of completed work above which retention stops accruing (a mechanism designed to limit the total retention held as a proportion of the contract sum).

Under NEC4 X16, the first half of the total retention is released at Completion (equivalent to practical completion under JCT). The second half is released at the Defects Date — the date specified in the contract data after which the contractor is no longer obliged to correct notified defects (typically 52 weeks after Completion). Release of the second moiety is not conditional on all defects being corrected; it is conditional only on reaching the Defects Date, though the employer retains the right to correct uncorrected defects at the contractor’s cost.

The Fiduciary Duty Problem

The trust language in JCT is legally significant but practically limited. The Harrington v Tyroddy case illustrates why. Even where the contract says the employer holds retention as trustee, courts have not automatically treated this as creating an express trust with the full consequences that would follow — including, critically, the obligation to hold the money separately and the contractor’s ability to trace it in insolvency.

The better-drafted construction contracts, particularly on larger projects, address this by requiring the employer to maintain a separate designated retention account and to provide evidence of its existence to the contractor on request. If your JCT contract has this provision, enforce it from day one. Write to the employer’s solicitors at the start of the project requesting confirmation of the account details. This creates an audit trail and gives you a much stronger position if you need to argue trust in insolvency proceedings later.

In Melville Dundas Ltd (in receivership) v George Wimpey UK Ltd [2007] UKHL 18, the House of Lords considered the interaction between retention and insolvency in the context of a JCT contract. Wimpey had suspended the subcontract following Melville Dundas going into receivership, and sought to withhold retention that would otherwise have been released. The Lords’ decision turned on the specific contract provisions relating to insolvency termination rather than the trust point, but the case illustrates the hard reality: when a contractor becomes insolvent, the question of who is entitled to the retention becomes fiercely contested, and the litigation is expensive.

When Retention Should Be Released — and Why It Often Isn’t

Under JCT SBC, the first moiety must be released on issue of the Practical Completion Certificate. This is not discretionary. If the employer issues the certificate, the first moiety becomes immediately payable subject to the normal payment notice provisions. Many contractors don’t claim it promptly, which is a mistake — include the first moiety release in your payment application immediately after practical completion is certified.

The second moiety should be released on issue of the Certificate of Making Good. Here is where things go wrong. Employers — and their contract administrators — routinely fail to issue this certificate even when the defects have been made good. The Rectification Period ends; the contractor has attended to all snagging items; but the certificate never arrives. Without the certificate, the contractual trigger for release of the second moiety has not occurred.

This creates a structural problem: the contractor is entitled to the second moiety, but the contractual mechanism for payment depends on a certificate that the employer controls. The employer — or the contract administrator acting on their behalf — has an implied duty under the JCT to act fairly and not to obstruct the certification process, but enforcing this duty requires litigation or adjudication.

Other common reasons for retention being withheld wrongly: the employer has a separate dispute about the final account and purports to withhold retention as a set-off without serving a valid pay less notice; the employer has cash flow problems and uses the retention dispute as a delay mechanism; there are genuine defects but the employer overstates their value to justify withholding more than the cost of rectification.

Set-Off Against Retention: The Pay Less Notice Requirement

An employer who wants to withhold retention for any reason must serve a valid pay less notice. This is not optional. The retention payment, when due, is a “notified sum” under s.111 of the Construction Act in the same way as any other interim payment. If no valid pay less notice is served specifying the sum the employer considers due and the basis for any deduction, the full retention amount is payable on the final date for payment.

This means that a smash and grab adjudication works just as effectively for retention as for interim payments. If the Rectification Period has ended, the Certificate of Making Good has been issued (or should have been issued), the retention has become payable, and the employer has served no valid pay less notice — refer the dispute to adjudication. The adjudicator will order payment of the full retention. The employer can challenge the merits in a true value adjudication later, but pays first.

The practical problem is that in many cases the Certificate of Making Good has not been issued, which means the contractor must argue either (a) the certificate should have been issued and the employer is in breach of duty by not issuing it, or (b) the Rectification Period has expired and the retention is now due in any event. The second argument is available in some circumstances depending on the contract drafting, but requires careful analysis. This is a dispute that benefits from a specialist construction solicitor.

Using Adjudication to Recover Retention

The process for recovering retention through adjudication is the same as for any payment dispute. You need a crystallised dispute — the retention has been demanded and refused, or the payment deadline has passed without payment. The dispute crystallisation requirement is satisfied once you have made a clear written demand and been refused or ignored.

Before serving the Notice of Adjudication, take these steps: (1) Write formally to the employer, specifying the precise sum claimed, the contractual basis for release (e.g., Certificate of Making Good has been issued; Rectification Period has expired), and requiring payment within 7 days. (2) If the employer responds with a dispute about defects, establish what defects remain. If they are minor and the employer is using them as a pretext, document that clearly. (3) Check whether a valid pay less notice has been served in the current payment cycle. If it hasn’t, you have a procedural smash and grab claim for the full retention regardless of the merits of any alleged defects.

Once you refer the dispute to adjudication, the Referral Notice should cover: the contractual entitlement to the retention (clause references, payment certificate, Rectification Period end date), the sum claimed, any pay less notice failures, and if relevant, a surveyor’s response to any alleged defects the employer is relying on to justify withholding.

Retention Bonds as an Alternative to Cash Retention

A retention bond is an insurance-backed guarantee that replaces cash retention. Instead of the employer holding 3–5% of the contract value in its accounts, the contractor (or subcontractor) procures a bond from a surety — typically an insurance company or bank — for the same value. If the contractor fails to remedy defects, the employer calls on the bond rather than using the retained money.

For contractors, a retention bond eliminates the insolvency risk entirely: there is no cash held by the employer. It also improves cash flow, since the contractor is paid the full valuation on each interim certificate. The cost of the bond — typically 1–2% of the retention sum annually — is usually significantly less than the commercial value of having that cash available in the business.

Retention bonds are not a standard feature of JCT or NEC contracts — they need to be negotiated. On large projects with creditworthy contractors, employers are increasingly willing to accept them. The Building Safety Act’s retention deposit scheme, if and when it comes into force, will provide an alternative protection mechanism, but until then, negotiating a retention bond from the outset is the most effective way for a contractor to protect itself against the insolvency risk.

Practical Steps for Chasing Retention

Keep a retention tracker for every contract. Record the total retention held at each valuation, the practical completion date, the first moiety release, the Rectification Period end date, and the second moiety due date. Don’t rely on the employer to chase up their own obligations.

As the Rectification Period end date approaches, write proactively. Confirm with the employer that all notified defects have been made good and request issue of the Certificate of Making Good. Give a deadline — 14 days is reasonable. If the certificate is not issued, write again and state that you will treat the failure to issue as a dispute and will proceed to adjudication.

When you serve the formal demand for payment of retention, be specific: state the sum, the contractual trigger event, the due date and final date for payment under the contract, and the pay less notice deadline. This establishes the payment timetable clearly and leaves no room for the employer to claim confusion about when any pay less notice is due.

If the employer serves a pay less notice with inflated deductions for alleged defects, challenge it. You don’t have to accept the notice as valid just because it was served on time. If the deductions are not specified with sufficient particularity, or if the alleged defects are overstated or already remedied, these are points for the adjudicator. The adjudicator’s job is to determine the correct value of the deductions, not just to rubber-stamp whatever the employer has claimed.

One final point on timing: retention disputes are often left too long. Contractors sometimes wait years before chasing the second moiety, by which time documentary evidence has been lost, witnesses have moved on, and the limitation period is looming. The six-year limitation period (12 years for contracts executed as deeds) runs from the date the cause of action accrued — broadly, when the money became due. Don’t let the clock run. If retention is due and not being paid, start the adjudication process.