Retention Money Guarantee

A Retention Money Guarantee is a bank guarantee that a contractor provides to a buyer in exchange for early release of retention money that would otherwise be held back from progress payments until the end of the defects liability period. It lets the contractor recover cash earlier while giving the buyer the same protection it would have had by holding the funds.

What is a Retention Money Guarantee?

In standard works contracts, buyers withhold a percentage, commonly five percent, from each progress payment as retention. Half is typically released at practical completion and half at the end of the defects liability period. This retention gives the buyer a financial hold over the contractor to ensure defects are remedied. A Retention Money Guarantee allows the contractor to substitute a bank guarantee for the withheld cash, releasing it to the contractor's account immediately while the guarantee remains in place for the buyer's protection.

The mechanism is common in development-bank-financed infrastructure contracts and is contemplated in FIDIC conditions of contract, which are widely used across World Bank, ADB, and eoi-financed projects. Like the performance-guarantee and the advance-payment-guarantee, the guarantee form is usually prescribed by the contracting authority and must be issued by an acceptable bank.

Why Retention Money Guarantee matters for bidders

For contractors, retention money tied up in the buyer's accounts for one to two years after practical completion is a significant cash-flow drain. A Retention Money Guarantee converts that locked cash into working capital, often worth more than the bank commission paid for the guarantee. The trade-off is that the contractor's credit lines must support both any live performance guarantee and the retention money guarantee simultaneously. Contractors should price the guarantee cost into their preliminary cost estimates and confirm that their bank can issue the instrument in the currency and form required before submitting a bid-security.

FAQ

When is a Retention Money Guarantee issued?

It is normally offered to the contractor at or shortly after practical completion, in exchange for the release of the full retention fund, and it remains valid until the end of the defects notification period.

Who decides whether to accept a Retention Money Guarantee?

The contracting authority, since the right to substitute a guarantee for retained cash is granted by the contract conditions. Bidders should confirm this option is available in the particular conditions before assuming it.

Does the Retention Money Guarantee cover both halves of retention?

Yes, when issued at practical completion it typically covers the total retention balance outstanding at that point, replacing the cash the buyer would otherwise hold until the defects period ends.