The job finished in March. The final account was agreed in April. In May the last payment came through and it was £8,400 short, which was not an error. It was the retention, and under the subcontract half of it fell due at practical completion and the other half twelve months later, at the end of the rectification period.
The first half arrived eventually, after three emails. The second half never did, because eighteen months after practical completion the main contractor went into administration — and retention money held by a company that fails is an unsecured debt like any other.
What retention actually is
A retention is a percentage of every payment withheld by the party above you in the chain, held as security that you will come back and put defects right. Typical practice is 3% to 5% of the contract sum, with half released at practical completion and the balance after the rectification period, commonly twelve months. The standard JCT forms are built around that shape, and subcontracts copy it down the chain.
The arithmetic is what nobody explains to a small trades business. On a £168,000 subcontract at 5%, the retention is £8,400. If the business runs at a 6% net margin, the profit on that job is around £10,000. So the retention is roughly 84% of the profit on the work, held in someone else's account, for a year, unsecured — and you have already paid your labour, your materials and your VAT out of the money you did receive.
Run three or four jobs like that at any one time and the amount permanently tied up elsewhere is a working capital facility you never applied for and are not being paid for.
Retention is not a discount and it is not a deposit. It is your profit, lent interest-free to a business whose balance sheet you have never seen.
Why chasing it is so hard
Three reasons, and they compound.
The release is not automatic. Most contracts require a certificate, a notice or an application before the money moves, and the clock often starts from a date — practical completion of the whole main contract, not your section of it — that you may not be told about. A subcontractor can be waiting on a release triggered by an event nobody informed them had happened.
The relationship discourages it. The party holding your retention is the party you want the next job from, which is precisely why the practice has survived so long.
And the sums are individually small enough to be uneconomic to fight and collectively large enough to matter. £8,400 is not a case anybody wants to take to adjudication. Four of them is £33,600, which is somebody's van, somebody's tax bill, or the reason a good firm runs out of cash in a busy year.
Where the law currently stands
The Housing Grants, Construction and Regeneration Act 1996 — the Construction Act — governs payment in construction contracts, and it is stronger than most small firms realise. It gives you a right to stage payments on contracts lasting more than 45 days, a right to defined payment due dates and payment notices, a right to suspend performance for non-payment after seven days' written notice, and a right to refer a dispute to adjudication at any time, with a decision normally inside 28 days.
What it does not do is regulate retentions. There is no statutory cap on the percentage, no requirement to hold the money in trust or in a separate account, and no protection if the party holding it becomes insolvent. That gap is the whole problem: the Act made payment dates enforceable and left the retention pot exposed.
You are also entitled to charge interest on a commercial debt that is genuinely overdue. Statutory interest runs at 8% above the Bank of England base rate, and with the base rate at 3.75% after the Monetary Policy Committee held it on 30 July 2026 that gives 11.75%, plus fixed compensation of £40, £70 or £100 depending on the size of the debt. Late payment interest: what you can actually charge covers how to use it without detonating the relationship.
What is changing
This is the part worth knowing, because it is unusually concrete.
The Government consulted on late payment from 31 July to 23 October 2025 and received 867 responses, publishing its response on 24 March 2026. On retentions, businesses were offered two options: prohibit retention clauses in construction contracts outright, or allow them but require the withheld money to be protected. The responses agreed broadly that retention practices contribute to late, partial and non-payment, and that the burden falls disproportionately on small and medium-sized contractors.
The Government chose prohibition. The Commercial Payments Bill was introduced to Parliament on 19 May 2026 and, alongside the intended retention ban, it caps payment terms in commercial contracts at a maximum of 60 days, gives the Small Business Commissioner powers to investigate poor payment practices, issue directions and impose financial penalties, and tightens payment reporting duties on larger businesses.
Two caveats on timing. The 60-day cap is expected to start no earlier than 2027, and commentary anticipates a transition period of roughly 12 to 24 months after enactment before the retention ban fully bites. An earlier proposal to tighten terms further to 45 days after that transition is not being taken forward for now, though the Government has said it may consult again on a further reduction.
So the direction is settled and the mechanism is in Parliament. The money you are owed today is still governed by the contract you signed.
What to do about the retention you are owed now
Price it in. If 5% of your contract sum is going to be withheld for a year, that is a financing cost. Add it to your quote the way you add plant hire. A business that prices as though it will be paid in full is quietly funding its customers out of its own margin.
Read the release mechanism before you sign. What triggers each half? Whose certificate? What notice must you give, in what form, and by when? If the trigger is practical completion of the whole project rather than your section, say so at tender stage and price the extra exposure.
Diary both dates. Put the practical completion release and the end of the rectification period into the same calendar that reminds you about VAT. Retention is lost to forgetfulness more often than to bad faith.
Apply in writing, every time. A dated application quoting the contract clause, sent to the named person, stating the amount and the trigger. It takes ten minutes and it is the document an adjudication runs on.
Credit check the party above you. Before you sign a subcontract that will leave £8,000 of your profit in someone else's account for a year, look at their filed accounts and their payment record. It is the same discipline as any other credit decision, because that is exactly what it is.
Use the Act. Adjudication is faster and cheaper than litigation, and suspension after seven days' notice is a real remedy rather than a threat. Neither is a nuclear option in a sector where both are routine.
If you are working out the wider cash position, the contract with ninety-day payment terms covers the other half of this problem, and CIS explained for people on the tools covers the deduction that lands on top of it.
The retention we never got back was £4,200: the second half of one job, on one site, on a project that had otherwise gone well. It was not a dispute and nobody behaved badly. It was money that sat in the wrong company's account until that company stopped existing. For the three years afterwards we quoted with retention priced in, and not one client ever queried it.
Common questions
Is there a legal maximum retention percentage in the UK?
No. The Construction Act regulates payment dates, notices, suspension and adjudication, but it says nothing about retentions, so the percentage, the release triggers and the length of the rectification period are whatever your contract says they are. Market practice is 3% to 5%, with half released at practical completion and the balance after a rectification period of commonly twelve months, but a contract can lawfully specify more. That absence of regulation is exactly why the Government has chosen to legislate: the Commercial Payments Bill, introduced on 19 May 2026, is intended to ban the withholding of retentions in construction contracts, with the implementation detail still subject to consultation and a transition period.
What happens to my retention if the contractor holding it goes bust?
It becomes an unsecured claim in the insolvency, which in practice usually means recovering little or nothing. Retention money is not held in trust and does not have to sit in a separate account, so it is not ring-fenced from the failed company's other creditors, and secured lenders and preferential claims rank ahead of you. That exposure was the strongest argument made in the consultation for banning the practice outright. Until the law changes, the protections available are commercial rather than legal: check the accounts and payment record of the party above you before signing, keep your total outstanding retention with them as one number you actually monitor, and apply for release the day it falls due.
Can I refuse to accept a retention clause?
You can try, and on smaller works you will sometimes succeed, particularly with a domestic or commercial client dealing with you directly rather than through a main contractor. Alternatives worth proposing include a retention bond, a lower percentage, a shorter rectification period, or release triggered by completion of your own section rather than the whole project. Further down a subcontract chain the clause is usually non-negotiable, in which case the answer is to price it rather than resist it: work out the cash cost of having that percentage withheld for the full period, add it to the tender, and treat it as a financing line like any other.
Does the Commercial Payments Bill mean I get my current retention back?
No. The Bill was introduced on 19 May 2026 and is not yet law, the retention ban remains subject to further consultation on how it will work in practice, and commentary expects a transition period of around 12 to 24 months after enactment. Even once it commences, it will apply to contracts caught by the new rules rather than retroactively to money already withheld under agreements you have signed. Treat it as a reason to expect better terms on future work, and as something to raise in negotiation now, but not as a reason to stop chasing. Today's retention is still governed by the contract, the Construction Act and adjudication.
