What are construction retentions?
A retention is a percentage of the contract sum — typically 3–5% — withheld by the client (or main contractor) until the end of a defects liability period. The first half is usually released on practical completion; the second half is released when the defects period expires, often 12 months later. Retentions are intended to incentivise contractors to return and fix defects, but in practice they represent significant cash tied up in completed projects.
How retentions usually work
A retention is a contractual deduction, not a separate tax or statutory fund. In practice, it is money held back under the construction contract as security against unfinished work or defects.
The usual pattern is simple:
- A percentage is deducted from each payment, often around 3% to 5%.
- Half is often released at practical completion.
- The balance is typically released after the defects liability period, often around 12 months later.
That means the right to the money depends on the contract and the stage of the project, not on the company’s preference or cashflow position.
If the company is solvent
If the construction company is closing while solvent, the directors should settle outstanding liabilities before the business is dissolved. That includes checking whether any retention is still due to subcontractors, suppliers, or the contractor itself.
If the company owes retention money to another party, that amount should normally be paid during wind-down, provided it is due under the contract and there is no valid reason to withhold it. If the company is owed retention money by a client or main contractor, it should raise the claim before closure and make sure the debt is documented.
A solvent strike off is not a shortcut to avoid paying valid retention claims. Creditors can object to dissolution where money is still owed.
If the company is insolvent
If the company cannot pay its debts, retention issues become part of the insolvency process. In that situation, retention money owed to the company becomes an asset that may be collected by the office-holder and distributed according to insolvency rules.
If your company owes retention to others, those creditors will usually rank alongside other unsecured creditors unless they have some specific contractual or proprietary protection. If your company is trying to recover retention from an insolvent client or contractor, the claim may become a debt claim in the insolvency process rather than a straightforward invoice dispute.
This is where the practical risk in construction lies: retentions are often not ring-fenced, so if the payer becomes insolvent, the unpaid retention may be lost or only partly recovered. That risk is one of the main reasons the government has reviewed retention practice in construction.
Who owns the retention money
Ownership depends on the contract wording and whether the money has been properly segregated. Government research found that retention monies are often held in a main bank account rather than in a protected trust structure, which means they are not usually ring-fenced from insolvency risk.
If a retention is expressly held on trust or in a protected account, the position can be materially different, because the money may fall outside the payer’s general insolvency estate. But unless the contract clearly creates that protection, businesses should not assume the money is safeguarded just because it is called a retention.
What happens on strike off
If a company is struck off and dissolved, outstanding creditors can object before dissolution takes effect, including those owed retention money. Once the company has been dissolved, a claimant may need to apply for restoration if it still wants to pursue the debt.
For construction businesses, this means strike off is only appropriate where there are no unresolved debts or disputes. If there are unpaid retentions on either side, the company should deal with them before filing for strike off.
Practical examples
If a subcontractor closes its company but is still owed half its retention, it should not assume the money is lost. If the payer is solvent, the subcontractor may still claim it under the contract before or during closure.
If a main contractor closes while holding retentions owed to subcontractors, those subcontractors become creditors. If the contractor is insolvent, they may recover only a proportion of the money, depending on the assets available and their ranking in the insolvency process.
If the contract says the retention is only released after defects are corrected, closure does not remove that condition. The real question is whether the contractual trigger for release has been met.
What SMEs should do
Small construction businesses should treat retentions as live balance-sheet items until they are actually paid or formally written off. They should also keep project records, payment notices, defect correspondence, and final account evidence so that any retention claim can be proved later.
Before closing a company, directors should:
- Reconcile every retention held and every retention owed.
- Check whether release conditions have been met under each contract.
- Notify counterparties early if a claim is still outstanding.
- Avoid strike off if any retention dispute remains unresolved.
- Take formal insolvency advice if the company cannot pay its debts.
Current policy context
The UK government announced in 2026 that it intends to ban withholding retentions in construction contracts, alongside other late-payment reforms, but those measures were announced as proposals and do not, by themselves, change the current law. For now, construction businesses still need to rely on the existing contract terms, construction legislation, and insolvency rules.
That makes the closure stage especially important. Until the law changes, retentions must be handled as contractual claims with insolvency risk, not as guaranteed future payments.