Retention in Construction Contracts

March 24, 2023

Retention in construction contracts is a crucial agreement where a percentage of payment is held until the completion of the project. This is to ensure that contractual obligations, including defect fixes, are met. As a Construction Lawyer with 10+ years of experience, we can provide expert advice to help you understand retention clauses and enforce your rights.

Retention in Construction

In construction, retention is the act where a principal contractor withholds a certain amount of money specified in the contract until the construction project is completed. This serves as an assurance that the subcontractor will carry out work properly and on time, avoiding instances where the principal must pay extra for the subcontractor’s shortcomings.

This money can be claimed after the actual completion of the works or at the end of the defects liability period, 3 months after the reference date of the final payment, or at the time frame specified in the construction contract.

But if it becomes harder to get this money back, then you can apply for adjudication, where you can receive the money as an adjudicated amount.

Retention Money

Retention money is a portion of the contract amount that is withheld to serve as an assurance to the principal contractor that the work will be completed to their satisfaction. It is a withholding amount that serves as a security to protect the head contractor in case the subcontractor fails to complete the job, or if defects arise during the defect liability period.

How Much Retention Money Can a Contractor Hold?

A common construction contract usually states that the amount of retention money is 5% of the contract’s value or a 10% deduction for every progress payment you receive. You should see this amount of retention money in your payment invoice.

Remember: The retained amount will depend on what you have agreed to in the contract.

The head contractor is responsible for maintaining a trust fund if the construction project has a value of over $20 million. He is obligated to give out annual account statements and withdraw money from the trust fund as stated in the retention clause and agreed in the contract.

What Are My Rights on Retention Money?

Retention money is a crucial aspect of construction contracts, and when agreeing to a retention clause, you have the right to:

Make a payment claim for the amount retained
Review the contract to avoid a ‘pay when paid’ clause
Enforce your Security of Payment rights, such as retention

To claim your retention money, ensure that you have completed your work to building standards and include the retained amount in your payment claim. It is your right to be paid for the work you have done, as agreed upon in the subcontractor agreement.

Watch out for ‘pay when paid’ clauses in the contract, as they are now prohibited. Even if you have already been paid, the principal contractor still has an obligation to pay you back the retention money during the defects liability period or as stated in the contract.

If you encounter issues getting your retention money back, hold the principal contractor responsible and seek adjudication if necessary. You deserve fair compensation for the work you have done.

Reasons for Holding Money

Principal contractors need to retain money so that they can be protected in situations where the subcontractors do not take responsibility for their shortcomings. Thus opting to withhold an amount prescribed in their retention contract clause or through a payment withholding request.

But, they should not hold this money forever. A subcontractor deserves to be paid the retention money when it is due for any of the following reasons:

The adjudication application is withdrawn;
The payment claim has been paid;
The dispute is being resolved through the debt recovery process; and
20 business days have elapsed since the adjudication application has been processed.

These reasons to apply for retention money that arises from the adjudication process. Some other scenarios may apply, just look over your contract clause on retention again.

Claiming Retention Money

As a subcontractor, claiming retention money is a process that you can’t avoid. When claiming retention money, ensure that you comply with the prescribed time frames in the contract. Usually, payment claims must include the amount of retention money you’re owed. It is the responsibility of the principal contractor to pay you the retained amount as agreed in the subcontract statement.

If the principal contractor fails to pay you as scheduled, take the next steps as prescribed in the contract. You can take it to adjudication or the courts as a payment dispute. The act of withholding money can also happen during adjudication. Whatever your situation is regarding retention money, the adjudication process will help you in your next move. However, if you still don’t get paid, then go to the courts and initiate the debt recovery process.

Enforce your Retention in Construction Rights

Legal advice from an expert building contact lawyer is essential when reviewing construction contracts and retention clauses to ensure that you understand your rights as a subcontractor. With expert legal advice, you can enforce your Security of Payment and subcontractor rights, preventing further payment issues.

Our Construction Lawyer in Melbourne offers legal consultation to help you get paid stress-free. Contact us today to secure your retention in construction contracts and protect your interests.

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