Index
Introduction
Retention money is a common feature of construction contracts. It allows the Employer to withhold a portion of payments otherwise due to the Contractor as financial security for the completion of the Works and the remedy of defects.
Although retention provides protection to the Employer, it also affects the Contractor’s cash flow because part of the Contractor’s earned revenue remains unpaid until specified contractual milestones are achieved.
The FIDIC Conditions of Contract for Construction, Second Edition 2017 (Red Book) contains specific provisions dealing with retention money. The principal provisions are Sub-Clause 14.3 [Application for Interim Payment] and Sub-Clause 14.9 [Release of Retention Money].
What is Retention Money?
Retention money is a percentage of amounts certified for payment that the Employer temporarily withholds from the Contractor.
For example, if the contract provides for 5% retention and ₹1 crore is certified in an Interim Payment Certificate (IPC):
Retention = ₹1 crore × 5% = ₹5 lakh
The Contractor would therefore receive the amount certified after applicable deductions, including the ₹5 lakh retention.
Retention is normally released in stages when the contractual conditions for release are satisfied.
The purpose is to provide the Employer with financial protection against:
- incomplete work;
- defective workmanship;
- failure to rectify defects;
- outstanding contractual obligations; and
- costs associated with completing or correcting outstanding work.
Retention Money under FIDIC Red Book 2017
Under the FIDIC Red Book 2017, retention is incorporated into the payment mechanism.
Sub-Clause 14.3 – Application for Interim Payment
The Contractor’s Statement for interim payment includes the amount to be deducted for retention.
The retention is calculated by applying the percentage of retention stated in the Contract Data to the relevant amounts, until the accumulated retention reaches the limit of Retention Money, if one is stated in the Contract Data.
Therefore, FIDIC does not simply prescribe a universal retention percentage such as 5%. The actual percentage and retention limit should be established in the contract.
For example:
- Retention percentage = 5%
- Limit of Retention Money = ₹5 crore
Once accumulated retention reaches ₹5 crore, further deductions should cease unless the Particular Conditions provide otherwise.
Sub-Clause 14.9 – Release of Retention Money
Sub-Clause 14.9 [Release of Retention Money] is the principal provision dealing with the release of retention under the 2017 Red Book.
The standard FIDIC mechanism provides for release in two halves.
First Half – Taking-Over
After the issue of the Taking-Over Certificate for the Works, the Contractor includes the first half of the Retention Money in its Statement.
Where a Section has been taken over, the relevant percentage of the first half is included, based on the percentage value of that Section stated in the Contract Data.
The Engineer then certifies the corresponding release through the payment mechanism.
Second Half – Expiry of the DNP
The second half becomes due after the latest expiry date of the Defects Notification Periods (DNPs).
For a Section, the relevant percentage of the second half becomes due after expiry of the DNP applicable to that Section.
The Contractor includes the relevant amount in its Statement, and the Engineer certifies the corresponding release in the next IPC.
The simplified mechanism is therefore:
Interim Payments → Retention Deduction → Taking-Over → First Half Released → DNP Expiry → Second Half Released
Retention and Outstanding Defects
Release of retention is not necessarily automatic merely because the relevant date has arrived.
FIDIC 2017 provides that, when certifying release of retention, the Engineer may withhold the estimated cost of work that remains to be executed under Clause 11 [Defects after Taking Over] until that work has been completed.
This provision is important in contract administration.
For example, assume:
- Total retention = ₹4 crore
- First half released = ₹2 crore
- Second half due = ₹2 crore
- Estimated outstanding remedial work = ₹50 lakh
The Engineer may withhold the amount justified under the contract for the outstanding work rather than automatically certifying the entire ₹2 crore.
Retention for Sections
Large construction projects are frequently divided into Sections.
For example:
- Section A – Road Works
- Section B – Bridge Works
- Section C – Interchange Works
Different Sections may be taken over at different times.
FIDIC 2017 specifically addresses retention release for Sections. The relevant percentage is based on the percentage value of the Section stated in the Contract Data.
An important point is that if the percentage value of a Section is not stated in the Contract Data, the standard Sub-Clause 14.9 mechanism does not provide for release of either half of the retention in respect of that Section.
Contract administrators should therefore check the Contract Data carefully where sectional completion applies.
Can Retention Money Be Replaced by a Guarantee?
The FIDIC 2017 Guidance permits the contract to provide for part of the Retention Money to be released and substituted by an appropriate guarantee.
If this mechanism is adopted, the acceptable form of guarantee should be included in the tender documents or Particular Conditions. FIDIC also recommends that a limit of Retention Money be stated in the Contract Data.
A retention guarantee can be beneficial to the Contractor because it improves project cash flow while continuing to provide security to the Employer.
However, the guarantee must comply with the contractual requirements concerning:
- amount;
- currency;
- issuing institution;
- validity;
- extension;
- form; and
- conditions of release or invocation.
Retention Money vs Performance Security
Retention money should not be confused with Performance Security.
| Retention Money | Performance Security |
| Deducted from interim payments | Separate contractual security |
| Primarily operates through Clause 14 | Addressed under Sub-Clause 4.2 |
| Released progressively | Released according to its own contractual mechanism |
| Directly affects Contractor cash flow | Usually provided as a bank guarantee or similar security |
| Linked to Taking-Over and DNP | Provides broader performance security |
A FIDIC contract may therefore require both retention and Performance Security.
Practical Example
Consider a contract with:
- Accepted Contract Amount: ₹100 crore
- Retention percentage: 5%
- Retention limit: ₹5 crore
If the maximum retention has accumulated:
Total Retention = ₹5 crore
After Taking-Over:
First half = ₹2.5 crore
After the applicable DNP expires:
Second half = ₹2.5 crore
However, if eligible outstanding work remains, the Engineer may withhold an amount representing its estimated cost in accordance with Sub-Clause 14.9.
Key Contract-Management Considerations
Contract Managers should maintain a Retention Register containing:
- Contract value;
- retention percentage;
- maximum retention limit;
- retention deducted in each IPC;
- cumulative retention;
- amount released at Taking-Over;
- applicable DNP expiry dates;
- outstanding defects/work;
- amount withheld against outstanding work; and
- final retention released.
This register should be reconciled with every Interim Payment Certificate and the final account.
FIDIC 2017 vs FIDIC 1999
An important point for contract professionals is that the FIDIC Red Book 2017 is not simply a renumbered version of the 1999 edition.
In the 1999 Red Book, retention was dealt with under Sub-Clause 14.9 [Payment of Retention Money]. In the 2017 Red Book, it is Sub-Clause 14.9 [Release of Retention Money].
Therefore, when reviewing an actual project, the Contract Manager should first identify the FIDIC edition incorporated into the Contract, followed by the Particular Conditions and Contract Data.
Conclusion
Retention money is an important mechanism for balancing the interests of the Employer and Contractor. It gives the Employer financial protection while providing the Contractor with access to most of its certified payments during construction.
Under the FIDIC Red Book 2017, the principal provisions are Sub-Clause 14.3 [Application for Interim Payment] and Sub-Clause 14.9 [Release of Retention Money].
The standard mechanism provides for the first half of retention to be released following Taking-Over and the second half following expiry of the applicable Defects Notification Periods, subject to the contractual provisions concerning outstanding work and defects.
For effective contract administration, retention should therefore be monitored from the first Interim Payment Certificate through Taking-Over, the Defects Notification Period and final payment.
In simple terms:
Retention money is a portion of the Contractor’s certified payment temporarily withheld as contractual security and progressively released when the contractual requirements for Taking-Over, defect rectification and completion of outstanding obligations are satisfied.
