Retention and performance bonds
Retention withholds part of each payment on a public contract until defects are put right, and a bond can replace it. Cash cost and how to get it released.
Updated on September 5, 2026
Retention is money the buyer holds back from each payment due to the supplier, as security that the work will be finished and that defects will be put right after handover. A retention bond or a performance bond is an undertaking from a bank, an insurer or a surety to pay the buyer instead, which lets the supplier be paid in full and protect its cash flow.
How it works
Nothing in United Kingdom law obliges a public buyer to take retention, and nothing caps it: it is a contract term, written into the contract conditions and into whichever standard form is used. In construction, retention of around 3 % to 5 % of each interim payment is the common market practice; in goods and services contracts it is rare, and buyers rely instead on service credits, a performance bond or a parent company guarantee.
The usual release pattern in works contracts is one half at practical completion and the balance at the end of the defects or rectification period, commonly a year later, once the defects certificate has been issued. The Housing Grants, Construction and Regeneration Act 1996 governs how the money is withheld: the buyer must issue payment and pay less notices within the contractual timetable, and a dispute over release can be taken to adjudication at any time. The Procurement Act 2023 implies a 30-day payment term into public contracts, running from receipt of a valid invoice (verified 2026-09-05, section 68), but that does not stop a lawful retention deduction.
Instead of cash retention, many buyers accept a retention bond of the same value, and Cabinet Office, Scottish and Welsh policy encourages project bank accounts on larger public works so that retention and payments due to the supply chain are ring-fenced. In Ireland the public works contracts of the Capital Works Management Framework set their own retention percentages and release dates, and the Construction Contracts Act 2013 gives the same right to adjudicate a payment dispute.
What it means for a bidder
Retention is a cash cost. On a one-year works contract, 5 % of every payment can be tied up for roughly two years. Replacing it with a bond costs a premium but frees the money at once, so compare the premium against the cost of the cash being held.
Read the contract conditions before you price: the percentage, the release dates, whether a bond is accepted in place of cash, and whether a performance bond, typically around 10 % of the contract sum in construction, is required on top. Ask your bank or surety early, because they will assess your accounts before committing, and a bond facility takes time to arrange.
At the end of the defects period, claim the balance. Buyers do not always release it on their own initiative, and unpaid sums attract statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998.
Example
A joinery firm wins the internal joinery package on a secondary school in Kent, worth £240,000. The contract conditions set retention at 5 %, so £12,000 is withheld in stages. Half is released at practical completion; the firm chases the balance twelve months later, after the defects certificate. On its next contract it offers a retention bond instead and is paid each valuation in full.
Frequently asked questions
Is retention compulsory?
No. It is a contract term and the buyer can drop it. It is standard in works contracts, unusual in goods and services.
Can I refuse retention?
Not if it is in the contract you tendered for. You can ask, before the deadline, whether a retention bond is acceptable instead, and many buyers say yes.
What if the buyer will not release it?
Apply formally for release, then use the adjudication route in the construction legislation or the contract's dispute procedure. Statutory interest runs on the late payment.