What is a Retention Bond?

The purpose of Retention is to ensure the contractor properly completes the works required under the contract. In some contracts, the client (the Obligee) may hold between 2.5% and 5% of the contract value (Retention Monies) for up to 6 – 24 months. This period of time is called the Defects Liability Period where you, the contractor (and Principal), will have to remedy defects. This means you will have to wait until the end of the Defects Liability Period to receive your 2.5% – 5% of the contract value. This may therefore have a negative effect on your cash flow. In this case, with a view to freeing up cash flow, we can offer a Retention Bond as an alternative solution. As the contractor (or Sub-contractor), you get to keep your cash! These types of bonds not only aid cash flow but also avoid the need to pursue retentions after completion of the contract.

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In short, a Retention Bond ensures that the Contractor receives the full amount of the agreed payment certificates without any retention monies being held. A bond is provided to secure the amount instead. And just as in the case of Retention, the value of the Retention Bond will reduce after the Certificate of Practical Completion has been issued.

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Financial Security; the client, in this case, the party employing a contractor (or sub-contractor), will receive the same financial security as they would by holding 5% of the contract value in the form of Retention Monies.

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In the case of the Construction Industry, a Retention Bond is a type of Performance Bond that protects the client after the completion of the contract. This provides a guarantee that the contractor (the Principal) will fix any issues after the job/project has finished (even after full payment has been made). The retention bond agreement includes an expiry date to avoid confusion about when contractors are released from the contract.

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Retention can also be applied to nominated subcontractors. As in the case of the main contractor, cash retention or a Retention Bond also provides financial security for the main contractor to guarantee the subcontractor full-fills the contract to the required standards. This acts as a safeguard to remedy defects.

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Why do you require a Retention Bond?

• As the contractor, you can hold onto your cash – saving you money and providing cash flow benefits.

• As the client, you get financial protection for your project.

• The client is also guaranteed that the contractor will fix any issues after the job/project has finished

• For both parties, there will be toing and froing to release the cash retention when the contract is complete.