FIDIC

Retention Under FIDIC — Security, Release, and Insolvency Risk

Retention is one of the most commercially contentious features of FIDIC contracts. It represents significant credit risk — and that risk falls on the contractor unless specific protections are in place.

7 min read · Updated 23/05/2026

In this article

1. The Nature and Purpose of Retention
2. Retention Rates and Release Tranches
3. Retention as Security — Trust Fund Implications
4. Employer Insolvency and Retention Risk
5. Retention Bonds as an Alternative
6. Release and Contractual Obligations

Key takeaway

Retention money held by an employer is an unsecured credit exposure. It is not automatically held on trust for the contractor unless the contract expressly provides for a trust fund. Employer insolvency before retention release is one of the most significant credit risks in construction. Retention bonds should be negotiated at tender stage as an alternative.

1. The Nature and Purpose of Retention

Retention is an amount withheld from each monthly payment to the contractor and held by the employer as security for the contractor’s performance. It is deducted from the certified amount: if the engineer certifies AED 1 million for Month 1 and retention is 5%, the contractor receives AED 950,000 and AED 50,000 is retained.

The stated purpose is to create a financial incentive for the contractor to perform the works in accordance with the contract, and to provide the employer with security for the cost of rectifying any defects that emerge after practical completion.

Retention is treated as the contractor’s money — held by the employer on behalf of the contractor, not as a loan or payment to the employer. However, without express trust provisions, the money is simply a debt owed by the employer to the contractor, and if the employer becomes insolvent, the contractor is an unsecured creditor for the amount.

2. Retention Rates and Release Tranches

FIDIC Red Book 2017, Clause 14.3 specifies that retention is deducted from each payment certificate, typically at a percentage (e.g., 5% or 10%) to a maximum amount. The retention continues until practical completion, at which point the first half of the retention is released.

The second half is released at the end of the defects liability period (typically 52 weeks after practical completion, unless the contract specifies otherwise). At that point, the contractor has received the full contract price and all retention has been released.

The retention mechanism creates a timing mismatch: the contractor has performed the work and has been partially paid, but significant money (often 5–10% of the contract value) is held by the employer and not released for many months. Over that period, the employer has the benefit of the cash, and the contractor bears the credit risk.

3. Retention as Security — Trust Fund Implications

The question of whether retention is held on trust for the contractor is a matter of contract interpretation and law. Under common law, a trust in relation to retention does not arise automatically. The money deducted from the contractor’s payment is simply a debt owed by the employer to the contractor.

However, FIDIC contracts can — and should — include express trust provisions. These specify that retention is held in a separate designated bank account, in trust for the contractor, separate from the employer’s general funds. This protects the contractor in the event of employer insolvency: the retention money is not part of the employer’s estate and is not available to the employer’s creditors.

Many FIDIC contracts do not include this protection as a standard clause — it must be negotiated or a specific provision selected. Where the contract is silent on trust, the contractor should assume that retention is held as a general debt and is at risk if the employer becomes insolvent.

In some jurisdictions, specific legislation (e.g., the Housing Grants, Construction and Regeneration Act 1996 in the UK) requires that retention be held on trust or in a designated account unless the contract expressly excludes this requirement. The contractor should verify the position in the project’s governing law jurisdiction.

4. Employer Insolvency and Retention Risk

If the employer becomes insolvent before retention is released, the contractor becomes an unsecured creditor for the retention amount. In an insolvency, the contractor may recover only a fraction of the retention (depending on the employer’s asset position and the priority of creditors), and may recover nothing at all.

Example: The contract value is AED 10 million. Retention at 5% means AED 500,000 will be held throughout the project. If the employer becomes insolvent 6 months before practical completion, the contractor has earned its right to the work performed (and to the main payment), but the AED 500,000 retention is at risk. If the insolvency is caused by financial difficulties, the contractor may not recover the retention at all.

This is one of the most significant uninsured risks in construction. Industry-wide, tens of millions of pounds in retention are lost each year to employer insolvency — a problem particularly acute in the subcontractor supply chain, where retention is held by the main contractor who is itself exposed to employer insolvency.

5. Retention Bonds as an Alternative

A retention bond (or retention guarantee) is an alternative to cash retention. Instead of deducting retention from payments, the contractor provides a bond from a surety (typically a bank or insurance company) guaranteeing the contractor’s performance. The employer holds the bond as security, and the contractor receives full payment without retention deductions.

The advantage for the contractor is immediate: the contractor receives its full entitlement each month (less only the bond premium). The credit risk is transferred from the contractor to the surety. The employer retains the same security — the bond will be called if the contractor fails to perform — but the cash is no longer held.

Retention bonds are increasingly negotiated in construction contracts, particularly where the contractor has financial strength to support bond premium costs (typically 1–2% of the bond value per annum) and where cash retention would significantly strain the contractor’s cash flow.

The contractor should assess this at tender stage: if retention will be a significant cash flow burden, propose retention bonds as an alternative. The cost (the bond premium) is typically lower than the cost of financing the retained cash.

6. Release and Contractual Obligations

Retention is released according to a contractual schedule: the first half (typically 50%) is released on practical completion; the second half is released when the defects liability period ends and the architect certifies that all defects have been remedied.

The employer is obliged to release retention in accordance with the schedule. If the employer fails to release retention when contractually required — for example, by withholding retention beyond the end of the defects liability period — this is a breach of contract and entitles the contractor to interest, damages, and (in cases where the breach is serious) suspension of further work.

The contractor should maintain a retention schedule from project inception, tracking the total amount held, the scheduled release dates, and the actual release dates. This creates a record for recovery of any interest or damages resulting from late release.

Retention and Cash Flow Protection

We advise on trust fund provisions, retention bond negotiation, and protection against insolvency risk. Retention management is fundamental to project financing strategy.

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