Retention
An amount held back from progress payments to ensure the builder returns to rectify defects after practical completion. Typically 5% of each progress payment, released after the defects liability period expires.
Definition
Retention is an amount held back from each progress payment, intended to give the owner leverage to enforce defect rectification after practical completion. The retained amount is released to the builder once the defects liability period has expired and any defects identified at handover have been fixed.
Why it matters
Retention is the practical mechanism that motivates a builder to come back and fix defects after the job is "finished" enough for the owner to take possession. Without retention, the builder's incentive to return for fiddly defect work after the final progress payment has been received is much smaller. Retention is also passed down the contracting chain: builders typically hold retention from subcontractors for the same reason.
How it works in practice
The standard retention amount in Australian residential contracts is 5% of each progress payment, held by the owner. After practical completion, the owner usually releases half of the retained amount immediately (or after a short period), with the remaining half released at the end of the defects liability period (typically 12 weeks to 6 months, depending on the contract).
If defects are identified during the defects liability period and the builder fails to rectify them, the owner can use the retained amount to pay another contractor to fix them. The retention serves both as security and as a financial deterrent against shoddy work.
For subcontractors, the same mechanic operates one level down. Builders retain 5-10% from subcontractor invoices and release it at the end of the build's defects liability period. This means a subcontractor might do work in the early stages of a build and not see the retained portion of their payment until 12-18 months later.
Common misconceptions
Retention is a separate payment
It isn't; it's an amount withheld from each progress payment, not an additional charge.
Retention guarantees the builder returns for defects
It motivates them but doesn't guarantee anything. If the builder is insolvent, disappeared, or refuses, the retained amount becomes a fund for the owner to engage another contractor, not a guarantee the original builder fixes anything.
Retention is cash held by the owner
Sometimes, but it can also take the form of a bank guarantee or insurance bond, particularly for larger contracts. Check what your contract specifies.