What is Retention?
The retention is a separate ‘pot’ of money, which increases in line with the price paid to the contractor. It is generally 3-5% of the price. It is deducted from the money due to the contractor and held by the employer.
What is it for?
Many employers assume that the retention money is theirs to pay for defects. In fact, most standard forms do not proscribe how the retention fund can be used. It could be used for any claim.
Who Owns the Retention?
UK standard form construction contracts contain express terms which require the retention to be held on trust (eg clause 16.1 JCT 2011 DB).
However, employers routinely delete these provisions. There are two reasons for this deletion: (1) to avoid the administrative necessity to place the retention into a separate bank account; and (2) to avoid having to borrow (draw down) the full amount of money from its funder.
If the provision to hold the retention on trust is deleted, without adding in a clause saying the employer does not have to hold it on trust, what is the position? According to comments from the judge in Bodill v Mattu * the retention would still have to be held on trust. Without a decisive statement though, this has been a matter for debate.
The Nature of Retention
In July 2011, the Court of Appeal in Malaysia in Qimonda Malaysia v Sedibena* confirmed their understanding of the law on retention monies:
- the retention monies are ‘by their nature and purpose’ trust monies for the contractor;
- no express words were required for the trust to be effective and enforceable, as a trust could be implied;
- the retention need not be held in a separate account as it is determinable and traceable (Re Kayford  followed);
- the purpose of the half fund retained following completion is for the making good of defects and once the relevant certificate of making good has been issued the retention must be paid to the contractor;
- the retention was not available as an asset in the event of employer insolvency.
For contractors: on public sector contracts, the Government advice is for zero retentions. For private sector contracts, ensure that the employer is under a clear and express duty to hold the retention on trust. By the time you need to rely on an implied term, the money may have disappeared!
For employers: take into account the cost of borrowing the gross valuation and administering the retention fund. If this is not commercially feasible, then consider using a retention bond or a project bank account.
For contract writers: to ensure both the contractor and the employer are properly aware of their obligations, ensure there are clear terms expressing their agreement. If there is no term, it leads to confusion.
For risk analysts: the position in most standard construction contracts is that the retention will be held on trust. If the contract deviates from this, the price for the works may need to increase to reflect the contractor’s increased risk.
*Cases: Boddill & Sons (Contractors) Ltd v Mattu  EWHC 2950 (TCC), Qimonda Malaysia Sdn Bhd v Sedibena Sdn Bhd Reported at  1BLR 6 – although a Commonwealth decision it will be persuasive in English & Welsh courts