Retention is a percentage of cumulative value held back on every interim certificate and released in two halves; the arithmetic is simple, its cost to the contractor is not small.
Retention is calculated on the cumulative gross valuation: multiply it by the retention rate, deduct that from the gross, then deduct everything previously certified to get the amount due. On an illustrative contract with 5 per cent retention, a gross valuation of 15,800,000 holds back 790,000 and, after 13,585,000 already certified, the certificate pays 1,425,000. By practical completion the retention reaches 1,315,055, which is 94.9 per cent of the contractor's entire overheads and profit.
Worked in full in Construction Cost Control by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Retention protects the employer against defects and an insolvent contractor. To the contractor it is an interest-free loan to the employer that peaks when the job is finished and the margin is at its thinnest. Both sides should know what it is worth in money, not just in percentages.
| Input | Value |
|---|---|
| Contract sum | 26,301,102 |
| of which overheads and profit | 1,385,189 |
| Retention rate | 5.0% |
| Release: half at practical completion, half after rectification | 50% / 50% |
| Construction programme, months | 24 |
| Rectification period, months | 12 |
| Contractor's cost of capital (illustrative) | 8.0% |
| Retention bond fee, a year (illustrative) | 1.5% |
Retention = cumulative gross valuation × retention rate
Amount due = gross valuation − retention − previously certified
In Excel, with the gross in B1, the rate in B2 and the previous certificates in B3: =B1*(1-B2)-B3. Because the deduction is on the cumulative figure each month, retention on earlier work is never deducted twice.
| Line | Amount |
|---|---|
| Cumulative gross valuation to date | 15,800,000 |
| Less retention at 5% | -790,000 |
| Net cumulative valuation | 15,010,000 |
| Less previously certified (14,300,000 gross less 5%) | -13,585,000 |
| Amount due on this certificate | 1,425,000 |
The month's work was 1,500,000; the contractor receives 1,425,000 and 75,000 joins the retention fund. That is the whole mechanism, repeated every month until practical completion. The same arithmetic applies down the supply chain: a subcontract with its own retention runs the identical certificate one tier lower, usually on thinner margins.
With the work valued along an S-curve over 24 months and no variations, retention builds to its maximum at practical completion: 5 per cent of 26,301,102, or 1,315,055. Half, 657,528, is released on the certificate of practical completion. The other 657,528 stays until the rectification period ends twelve months later and the defects are made good.
Across those 36 months the average balance held is 675,792. Funded at the contractor's 8 per cent cost of capital, retention costs 156,530, or 0.60 per cent of the contract sum. That sounds small until it is set against the margin: overheads and profit are 1,385,189, 5.27 per cent of the contract, so retention costs the contractor 11.3 per cent of its margin before a single defect is found.
A retention bond replaces the cash with a surety's guarantee. Bonding the full 1,315,055 for three years at an illustrative 1.5 per cent a year costs 59,177, against 156,530 to fund the cash. Because the bond covers the full amount from the first month while the cash fund only builds up to it, the comparison is not fee against cost of capital: here the bond stays cheaper up to a fee of 3.97 per cent a year, about half the 8 per cent. For the employer it swaps cash in hand for a credit claim on the surety.
From the employer's side the fund is protection with a ceiling. At practical completion it holds 1,315,055 against defects and the cost of replacing a failed contractor; after the first release it holds 657,528 for the rectification period. Whether that is enough depends on the job, not the percentage, so the rate should be set by asking what finishing or putting right the work would cost, not copied from the last contract.
| Retention rate | Release at practical completion | Maximum held | Funding cost | % of OH&P |
|---|---|---|---|---|
| 3% | Half | 789,033 | 93,918 | 6.8% |
| 3% | None | 789,033 | 124,378 | 9.0% |
| 5% | Half | 1,315,055 | 156,530 | 11.3% |
| 5% | None | 1,315,055 | 207,297 | 15.0% |
The release clause matters almost as much as the rate. Holding all of a 5 per cent retention through the rectification period adds 50,767 to the cost; cutting the rate to 3 per cent with the usual half release saves 62,612. The cost of capital moves it too: at 6 per cent the base case costs 118,420, at 12 per cent 230,848, which is where many subcontractors actually borrow.
Variations change the base. If the final account rises to 29,153,363, retention at completion is 1,457,668, half of it 728,834: 142,613 more than on the contract sum. Retention follows the gross valuation, not the original price.
Gross valuation times the rate, deducted on the cumulative figure, less previous certificates: 1,425,000 due on this certificate, 1,315,055 held at completion, 156,530 to fund it. Construction Cost Control follows one contract from the contract sum to the final account, and the free workbooks for this case rebuild that contract sum layer by layer. The cost of time on the same project is worked in how to calculate prolongation costs.
Typically half at practical completion and the balance when the rectification or defects period ends and the defects are made good, though the contract governs. On an illustrative 26,301,102 contract at 5 per cent, 1,315,055 is held at completion, 657,528 is released then, and 657,528 is held for a further twelve months.
On the cumulative gross valuation, then the amount due is the gross less retention less everything certified before. With a gross valuation of 15,800,000 and 5 per cent retention, 790,000 is held and 15,010,000 is the net cumulative figure; with 13,585,000 previously certified, 1,425,000 is due.
The cost is financing the cash held back. On an illustrative 26,301,102 contract over 24 months plus a 12-month rectification period, 5 per cent retention averages 675,792 outstanding and costs 156,530 at an 8 per cent cost of capital, 11.3 per cent of the contractor's overheads and profit.
This article is one calculation from Construction Cost Control. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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