CISR15040 | The Scheme: payments: retention payments

Some contracts relating to construction operations allow the contractor to retain a portion of the contract price for a period after the construction work has been completed. This happens so that if deficiencies in the work done become apparent in this period the final payment can be withheld until the subcontractor has made good the faults. If the contractor is satisfied at the end of this period the payment withheld is released to the subcontractor. These payments are known as ‘retention payments’.

There are no special rules for retention payments. They are treated in the same way as any other payments. Whether the retention payment is made gross or under deduction depends on the subcontractor’s payment status at the date of payment, not when the work was done.

The retention payment can also be made up of different components, so that a retention payment can be partly a contract payment due, and partly a payment reimbursing the subcontractor for materials supplied for the contract.

Retention periods can last for years and it may be that in this period the subcontractor’s circumstances change. The business may cease or gross payment status held when the work was done may no longer be held when a retention payment is due to be paid. On the other hand, a subcontractor who was only entitled to be paid under deduction when the work was done may have qualified for gross payment by the time payment is made entitling them to receive the payment in full.