What is Retention in Construction Accounting?

by Dec 29, 2022Uncategorized

It’s more than likely you’ve come across a retention clause in your contract when working in construction. If you haven’t, it’s important to understand how it all works.

Retaining money is a way for a client to ensure the work you carry out is to the best standard possible. Unfortunately, though, this can have some major implications on your cashflow.

By no means is retention an easy thing to navigate, so we aim to explain it in as clearer terms as possible.

Retention – the basics

Retention is when a client may withhold a certain amount of money from each payment to a contractor or subcontractor, which covers any additional expenses that may arise.

Usually, this will be if the work you’ve carried out isn’t fully complete or up to standard.

Put simply, retention is a way for your clients to make sure they’re happy with your work before they pay you in full.

Usually, a client will keep up to 5% of the contract sum, almost as a sort of insurance. The client can then deduct charges if you cause any damages throughout the work or if you’ve finished the job without clearing up afterwards.

This is mainly to cover any further costs your client may have to pay to complete the work with someone else.

When will I receive the retained money?

Any held money will be paid out to you once the contract is complete without mistakes. Sometimes, you may receive the funds at various stages depending on the rules of the contract.

In some cases, your client will pay half of the retention once the contract is complete. You will then receive the other half once everything is clear and the work is up to standard.

A client will include any rules around retention payments in your contract, so be sure to read through it carefully.

Retention abolition

Retention can be a difficult thing to deal with, especially when you’ve got your cashflow to think about.

But you might not have to worry about it in the near future, after the introduction of the Retention Abolition Bill.

Currently, in its first reading in the House of Lords, the bill suggests that retention should end to stop withholding of payment towards contractors.

Its two main points are:

  • any clause in a construction contract which enables a payer to withhold retention monies will be of no effect from 25 January 2025
  • any retentions withheld at that date must be repaid in full within seven days.

Currently, there are no regulations around retention, so you’ll need to read any contracts carefully, especially if your client is holding on to any payments.

What about the Construction Act?

While the Bill is under discussion, the Construction Act does already set out some rules about retention payments, third parties, and other contracts. These are quite complicated, though, so it’s best to get advice if you’re not sure.

These rules aim to tackle the burden that a Government survey discovered ‘unjustified late and non-payment’ of retention money causes contractors. The findings also called retention ‘a drain on working capital’ – something you’re probably familiar with!

Here to help

It’s no secret that retention can be a pain for contractors and subcontractors like yourself. But the best way to manage these awkward stages of your contract is by chatting with an expert accounting team. We’ll be on hand to help you manage your cashflow, so any retention in your contract doesn’t become a drain on your resources.

Contact us today to discuss retention payments.




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