International Construction Law Review


Jeremy Coggins

Associate Professor, UniSA STEM, University of South Australia

Mitchell Francis

Associate, Corrs Chambers Westgarth


Retention of cash from payments by principals to contractors, and by head contractors to their sub-contractors, has traditionally been and remains widely used as a form of security to guarantee the proper performance of construction works in the construction industry. Retention provisions in construction contracts typically provide that:1
(a) the principal is entitled to withhold an agreed percentage (typically, between 3 per cent and 10 per cent) from progress payments; and
(b) the principal shall release a proportion (typically 50 per cent) of withheld retention money at practical completion of the works with any remaining retention money released following the expiry of the contractually agreed defects liability period (DLP).
Retention provides a pool of readily accessible funds for principals to access if a contractor defaults on its contractual obligations – for example, where a contractor fails to rectify defective work or fails to complete works due to insolvency. As well as providing performance security to principals, the release of retention acts as an incentive for contractors to complete works expediently and honour their contractual obligation to rectify defective works during the DLP.
The practice of retaining a proportion of payments to contractors until completion of the works has its roots in the construction of the British railway system in the 1840s, when railway companies engaged many newly formed contracting entities that were often unable to perform successfully.2

Pt 2] Is There a Place for Retention in Today’s Construction Industry?


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