Retention bonds
Produced in partnership with Kennedys

The following Construction practice note produced in partnership with Kennedys provides comprehensive and up to date legal information covering:

  • Retention bonds
  • Why are retention bonds used?
  • Key features of the retention bond
  • Other features of retention bonds
  • Demand procedure
  • Maximum bond amount
  • Duration of the retention bond/Implications of expiry
  • Time and indulgence provisions
  • Assignment provisions
  • Summary

Retention bonds

A retention bond is a particular form of performance bond usually written as an 'on demand' instrument. This Practice Note examines:

  1. the nature of retention bonds

  2. why they are used in the construction industry

  3. the key features in the wording of the retention bond

For a guide to performance bonds generally, see Practice Note: Performance bonds—construction projects.

Why are retention bonds used?

In any building contract, it is commonplace for the payments due to the contractor from the employer to be subject to retentions, meaning a pre agreed percentage of each instalment paid to the contractor under the building contract is withheld by the employer (the 'retention'). Typically, when the building contract works are practically complete, an agreed proportion of the retention is released to the contractor. Half the retention is usually released at practical completion. The balance of the retention is released to the contractor at final completion/making good defects. See Practice Note: Retention of payment in construction contracts.

The purpose of the retention is to provide the employer with a measure of protection, if defects appear in the work, or there are other breaches of contract on the part of the contractor. The employer is able to set off the contractor’s liability, in relation to the defects or breaches, against money which would otherwise have become payable to the contractor, out of the funds withheld

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