What is retention money in construction contracts?
Retention money is the part of each running bill that the employer holds back from a contractor as security until the work is accepted. In government works it is usually 5% of each bill.
Also called retention, security deposit, retention amount.
Retention protects the employer if the contractor leaves defects or does not finish. It is deducted from every running account bill, held until the work is accepted, and then released in stages.
The government rule. Section 5.1.3 of the Ministry of Finance’s Manual for Procurement of Works (Second Edition, 2025) says works contracts usually withhold a percentage of each running bill, usually five per cent, as security deposit or retention money until final acceptance. The earnest money paid with the bid may form part of it. The contractor may replace the cash retention with an unconditional bank guarantee or insurance surety bond once the amount reaches half its limit, and again when it reaches the full limit.
When it is released.
- One half when the taking-over certificate is issued (in proportion, if it is issued in parts).
- The other half 60 days (or the period the tender sets) after the defects liability period ends, or on final payment if that is earlier, on the engineer’s certificate.
How it differs from performance security. Performance security is a separate guarantee the contractor furnishes, generally 14 to 28 days after the award. It stays valid until 60 days after all obligations, including the defects liability period, are complete, and is refunded without interest. Retention is built up from the bills themselves.
A private builder’s contract sets its own percentage, limit and release terms; the government manual is a useful reference for what is usual.
Worked example (sample figures). A ₹2 crore work order with retention at 5% of each bill and a 12-month defects liability period:
| Item | Amount |
|---|---|
| Retention held once ₹2 crore of bills are certified | ₹10,00,000 |
| Released on the taking-over certificate | ₹5,00,000 |
| Released 60 days after the 12-month defects period | ₹5,00,000 |
Keep the retention held, the bank guarantees taken in its place and their expiry dates in one register, so that releases are neither missed nor paid early.
LoftRay’s construction module handles RA bills and retention release.
Source, read on 9 Nov 2026: Manual for Procurement of Works, Second Edition 2025 (Department of Expenditure).