Retention Money in Construction: Meaning and How It Works

Retention money in construction is an amount withheld from a contractor’s running bills until the agreed work and defect obligations are completed. It gives the owner financial protection if unfinished work or defects are not corrected as required by the contract.

Retention is also called retention amount or retention deduction. It commonly appears in work orders, construction contracts, RA bills and final bills. The contract should state how the amount is calculated, its limit, when it will be released and what documents are needed.

There is no single percentage or release process that applies to every project. Government work, private construction and interior contracts may use different terms. Always read the signed contract and ask your CA or contract adviser about tax, accounting and legal treatment.

Why owners keep retention

An owner pays for work in stages, often through running account or RA bills. At that stage, the whole project is not yet complete. Some work may still need measurement, testing, finishing or correction. Retention gives the owner an amount to hold until the contractor meets the agreed conditions.

The main purpose is performance protection. For example, a contractor may need to repair leakage, replace damaged tiles, complete snag work or submit final documents. If the contractor completes these duties, the retained amount becomes payable according to the contract.

Retention can also encourage proper closure. Site teams sometimes focus on new work while small pending items remain open. A clear retention register helps the owner, contractor, mistri and accounts team see which amount is held against which bill and why.

Retention should not be treated as an informal or unexplained deduction. The work order should define it. Each bill should show the deduction separately. Both parties should be able to match the retained amount with the certified work and payment received.

How retention is deducted from RA bills

An RA bill records the value of work completed up to a particular date. After measurement and certification, the owner may make deductions listed in the contract. These can include retention, previous advances, taxes or other authorised recoveries.

The retention percentage comes from the contract. Do not assume a standard rate. The contract may also place a maximum limit on total retention or apply the deduction only to certain parts of the certified value.

Simple example

Assume an RA bill has certified work worth Rs 10,00,000. The signed contract says that 5 percent will be retained from the relevant certified work. For this example, the retention deduction is Rs 50,000.

This is only an illustration. The actual calculation may use a different base. GST, TDS, advances, material recovery and other deductions can change the amount finally paid. Check the billing clause and ask your CA how each entry should appear in the accounts.

The bill should show the current retention and retention held earlier. It is useful to maintain a running total. Otherwise, the contractor may know the payment received but not the exact amount still held by the owner.

Release after completion and the defect liability period

Retention is released according to the contract. Some contracts link one part of the release to practical or substantial completion. The remaining part may stay with the owner until the defect liability period ends. Other contracts use different milestones.

The defect liability period is the agreed time during which the contractor must attend specified defects after completion or handover. Its length and scope depend on the contract. Do not assume that every contract uses the same period.

Before requesting release, the contractor may need to complete snag items, submit measurements, obtain completion approval, close material reconciliation and provide required certificates. Interior contractors may also need to hand over keys, warranties, test records or as-built information if the contract asks for them.

The final bill should reconcile the complete account. It should show total certified work, earlier payments, approved variations, retention held, deductions, taxes and the balance payable. Both parties should record the date and basis of every retention release.

Expiry of a defect liability period does not automatically settle every dispute. Release can still depend on certification, pending defects or documents under the contract. Send the claim in writing and attach the required records. If payment is delayed or disputed, check the contract and obtain suitable professional advice.

Retention vs security deposit vs performance guarantee

These terms are related, but they are not always interchangeable. Their exact meaning depends on the tender, work order or contract. The following comparison explains their general use only.

A contract may use more than one of these protections. It may also use the words differently. Read the definitions and payment clauses together. Ask for clarification before signing if the deduction, validity, release condition or claim process is unclear.

Keeping track of retention across many contractors

Retention becomes difficult to control when one project has civil, plumbing, electrical, fabrication and interior contractors. Each contractor may have several RA bills, different contract terms and separate release dates. A single payment total is not enough.

Maintain a contractor-wise retention register with these fields:

• Project and contractor name
• Work order or contract reference
• RA bill number and certification date
• Certified value used for the calculation
• Contract retention rate and any stated limit
• Retention deducted in the current bill
• Cumulative retention held
• Completion and defect liability milestones
• Amount released, release date and payment reference
• Balance still payable

A spreadsheet does this well for a small number of bills. It is flexible, familiar and easy to share with a CA. However, someone must update formulas, protect old entries and prevent duplicate or missing bills. Keep approved bill copies and payment proofs with the register.

As the number of projects grows, connect bill records with site-wise payments and expenses. Trackovo’s finance management tools can record project payments and expenses in one system. Use the contract itself as the authority for retention calculations and release conditions.

Set a monthly review between the project engineer and accounts team. Match certified bills with bank payments, TDS records and contractor ledgers. Confirm that every retention release has written approval. This reduces confusion during the final bill and contractor settlement.

Common questions

Is retention money an extra charge to the contractor?

No. In general, it is part of the contractor’s certified amount that is temporarily withheld. Whether it becomes payable, and when, depends on completion, defect correction and other conditions written in the contract.

Is there a fixed retention percentage for every construction contract?

No fixed percentage should be assumed. The percentage, calculation base and maximum deduction must be checked in the contract or work order. Ask your CA or contract adviser if the wording is unclear.

When can a contractor claim retention money?

The contractor can submit a claim when the relevant contractual milestone is met. This may involve completion, snag closure, final certification or expiry of the defect liability period. The exact timing and documents depend on the contract.

How should retention be shown in an RA bill?

Show it as a separate deduction with the applicable contractual rate or basis. Also show retention held earlier, the current deduction, any release and the cumulative balance. Confirm the GST, TDS and accounting treatment with your CA.