Retention Money

Retention money is the portion of each progress payment certificate that the employer holds back during contract execution as a form of performance security, giving the employer a readily accessible fund to remedy defects or incomplete work without immediately calling on a separate bond.

What is Retention Money?

Under most standard works contracts used in international procurement, including FIDIC forms endorsed by the World Bank and other MDBs, the employer deducts a fixed percentage, commonly 5 or 10 percent, from each progress-payment certificate. This accumulates into a retention fund held by the employer until certain contractual events occur. Half the retention is typically released at the time of the taking-over certificate, when the works reach substantial completion. The remaining half is held through the defects liability period and released with the final-payment certificate at the end of that period, which typically runs 12 months after taking-over.

Some contracts allow the contractor to substitute a retention money guarantee, a bank guarantee of equivalent value, in place of the cash retention, which frees the withheld funds for the contractor's working capital while giving the employer equivalent security. This option appears in some World Bank standard forms and is increasingly used on large contracts where the withheld cash is material.

Why Retention Money matters for bidders

Retention money is a hidden working capital cost that suppliers must price into their bids. On a large contract, 5 to 10 percent of billings locked up for 12 to 18 months after completion represents a real financing burden. Check whether the contract allows substitution of a retention-money-guarantee: if so, factor the cost of the bank guarantee against the cost of carrying the withheld cash. Also confirm the release conditions in the special conditions of contract, because some employers interpret "substantial completion" narrowly and delay the first release tranche unreasonably, which gives grounds for a formal claim.

FAQ

What is the typical retention percentage?

Retention is most commonly set at 5 or 10 percent of each certified payment amount, with a cap that stops accumulating once the total reaches a stated maximum, often 5 percent of the contract price.

When is retention released?

Half is usually released at substantial completion and the remainder at the end of the defects liability period when the employer issues the final payment certificate.

Can a contractor replace cash retention with a guarantee?

Yes, where the contract permits. The contractor provides a bank guarantee of equivalent value in place of the withheld cash, recovering the retained funds earlier while the employer retains equivalent security.