Retention Money and Security Deposit: How Much Is Held and for How Long

Retention is your money, deducted from every bill, held for years, and released only when someone asks. In a firm with several completed contracts it is frequently the single largest pile of forgotten working capital on the balance sheet.

What it is

Retention money, or security deposit, is a percentage deducted from each running bill and held by the buyer as security for performance and for making good defects.

It is distinct from the performance bank guarantee, which is furnished at award as an instrument. Many contracts require both, which means the same performance is secured twice.

How much and how long

The percentage is set by the contract, deducted from each bill, often up to a ceiling expressed as a percentage of contract value.

Release usually happens in two stages:

• Part on completion, when the work is certified complete
• The balance after the defect liability period, once no defects are outstanding

The defect liability period is commonly twelve months or longer from completion. So the last tranche of retention on a two-year contract can sit with the buyer for three years from when the first bill was raised.

Substituting a guarantee

Many contracts permit retention to be released against a bank guarantee of equivalent value.

Whether that is worth doing is arithmetic: the guarantee costs commission and locks margin money, but releases the full retention as cash. Where the retention is large and your working capital is tight, the swap is usually worth it. Where the retention is small, the guarantee's administrative overhead may not be.

See bank guarantee, FDR or insurance surety bond for how to compare the instruments.

Getting it released

This is where the money is actually lost, and the reason is simple: release requires a request, and after a contract closes nobody in the contractor's office owns the relationship any more.

The sequence:

1. Confirm the defect liability period has expired and no defect notices are outstanding
2. Write to the buyer requesting release, quoting the contract, the completion certificate, the DLP expiry, and the amount held
3. Attach the [completion certificate](/blog/completion-certificate-vs-work-order) and a statement of deductions from each bill
4. Follow up in writing, escalating within the department
5. Reconcile what is received against what was deducted, because part-releases are common and the balance stays behind

Step five catches a real problem: a partial release feels like resolution, and the remainder sits for another two years.

The register

The same discipline that works for EMD refunds:

| Field | Why | | --- | --- | | Contract and buyer | To quote | | Retention deducted per bill, cumulative | The amount to claim | | Completion date | Starts the DLP clock | | DLP expiry | When release becomes due | | Release requested date | The trail | | Amount received, balance | Catches part-releases |

Reviewed quarterly. For a firm with a handful of completed contracts this is a short document and it is frequently worth a large sum.

Pricing it in

Retention is one of the financing costs of a public contract, alongside EMD, guarantee margin and the running bill cycle. Together they are what turn a nominal margin into a real one, or into a loss.

Compute the cost of retention as the amount held multiplied by your cost of capital multiplied by the years it is held. On a long contract that number surprises people. See how to price a government tender.

When release is refused

Where a buyer withholds retention citing defects, ask for the defects in writing, with specifics. Make good what is genuinely yours to make good, and record it.

Where retention is withheld without a stated reason after the DLP has expired, the escalation path is the same as for any overdue payment. See when a government payment is late.

Avsar tracks retention deducted, DLP expiry and release status against every contract. See the treasury module.