# Retention Money and Bank Guarantees in Fit-Out Contracts

> Retention money is part of each payment that the client holds back as security for completion and defects, usually released in stages at practical completion and at the end of the defects liability period. A performance bank guarantee secures the contractor's performance; an advance bank guarantee secures an advance payment. Amounts, triggers and conditions are set by the contract.

## Security has a price, and the client pays it

Retention money and bank guarantees are the client's security in a fit-out
contract. They exist so that, if the contractor does not finish the work or
does not return to fix defects, the client has money it can use.

The common misconception is that more security is always better for the
client. It is not free. **Every amount withheld or guaranteed is financed by the
contractor, and the cost of that finance is priced into the quote.** A contract
that stacks high retention on top of a large performance guarantee and strict
payment terms is not only safer; it is also more expensive, and it strains the
cash flow of the business building your office.

For a CFO the question is not how much security can be extracted. It is how
much is enough for the risk, in what form, and how it is released. That balance
is set at contract stage and is hard to change afterwards.

## The instruments, side by side

| Instrument | What it secures | How it works | Typically released | What to check |
| --- | --- | --- | --- | --- |
| Retention money | Completion and making good of defects | A portion of each running bill is withheld by the client | Part at practical completion, balance at end of the defects liability period | Proportion, any cap, release triggers, conditions |
| Performance bank guarantee | Performance of the contract as a whole | The contractor's bank undertakes to pay the client on the terms in the guarantee | Returned at a stage the contract defines, often after completion or the defects period | Amount, wording, validity, claim period |
| Advance bank guarantee | Repayment of an advance paid to the contractor | Secures the advance while it is recovered from running bills | Reduces or is returned as the advance is recovered | Whether its value reduces with recovery |
| Retention bank guarantee | Replaces cash retention | Bank guarantee given in place of withheld cash | On the same triggers as the retention it replaces | That validity covers the full defects period |

The proportion of retention, the amount of each guarantee and the release
points are all set by the contract. They vary between contracts and between
clients, so any figure quoted without the contract in hand is a convention,
not a rule.

## How retention moves through the project

Retention is deducted from each running account bill as the work is measured
and paid. Where the contract is item-rate, those bills follow the agreed method
of measurement, commonly referenced to **IS 1200**. Some contracts stop
deducting once retention reaches a stated limit; others continue to the end.

Release usually happens in two stages. The first is at
[practical completion](/glossary/practical-completion), when the client takes
the space and the contractor's main obligation is met. The second is at the end
of the [defects liability period](/glossary/defects-liability-period), once
defects notified during it have been made good.

Many contracts tie release to more than a date. Delivery of as-built drawings,
operation and maintenance manuals and commissioning records is a common
condition, because those documents are hard to obtain once the money has gone.
What a client should expect to receive is covered in
[fit-out handover documents: what you should receive](/blog/fit-out-handover-documents-what-you-should-receive).

## What a bank guarantee actually is

A bank guarantee is an undertaking by the contractor's bank to pay the client
an amount on the terms written in the guarantee. The **Indian Contract Act,
1872** defines a contract of guarantee in Section 126 as a contract to perform
the promise, or discharge the liability, of a third person in case of their
default. How a particular bank guarantee operates, and when it can be invoked
or resisted, depends on its wording and on the facts, and is a matter for the
client's lawyer.

For a client, the practical points are about the document itself:

- **Wording.** Guarantees may be conditional on proof of default or payable on
  demand. The difference is significant and should be settled before issue,
  usually by agreeing a format at contract stage.
- **Amount.** It should match what the contract requires, and for an advance
  guarantee, whether it reduces as the advance is recovered.
- **Validity and claim period.** A guarantee that expires before the defects
  liability period ends, or with no time to lodge a claim after expiry, may
  not cover the risk it was meant to.
- **Extension.** Who must arrange an extension if completion is delayed, and
  by when.
- **Issuing bank.** Contracts often specify the kind of bank acceptable.

## How it all ties to the defects liability period

The defects liability period is the hinge between the two halves of the
security. Before practical completion the client is mainly protected against
non-completion; after it, against defects. A clear contract sets out what is
held at each stage:

1. **Contract signing.** Any advance is paid against an advance guarantee; a
   performance guarantee is provided if the contract requires one.
2. **During the works.** Retention is deducted from running bills; the advance
   is recovered and its guarantee reduces.
3. **Practical completion.** Part of the retention is released; the
   performance guarantee may be reduced or continue, as the contract says.
4. **End of the defects liability period.** Once defects are made good, the
   balance of retention is released and the remaining guarantee returned.

The release at each stage is only as clean as the record behind it. A dated
defects log, with each item notified in writing, assigned, closed and signed
off, is what allows the final retention to be released without argument. If
the client cannot show what was notified, the contractor cannot show what was
fixed, and the balance sits unpaid while both sides reconstruct the history.
The process for notifying and closing defects during that period is covered in
the handover, snagging and defects guide.

## Over-securing the contract

Security instruments are often added one at a time, each reasonable alone.
Retention, a performance guarantee, liquidated damages for delay, and payments
withheld against disputed items can together tie up a large share of the
contractor's working capital.

The result is predictable. The quote includes the cost of carrying that
capital, and a contractor under cash strain slows down or presses for
advances. When comparing bids, align the security and payment terms along with
the scope, as described in
[comparing fit-out quotes line by line](/blog/comparing-fit-out-quotes-line-by-line).
Accepting a retention bank guarantee in place of cash retention is one way to
keep the security while easing cash flow.

## Common mistakes

- **Treating retention as a discount.** It is the contractor's money held as
  security, and releasing it on time is part of the client's obligation.
- **Undefined release conditions.** "On satisfactory completion" with no
  criteria invites argument.
- **Guarantees that expire too early.** Validity ends before the defects period
  does, with no claim period.
- **No agreed format.** The guarantee arrives in wording nobody reviewed.
- **Stacking security.** Every instrument is added, and the price rises to
  match.
- **Forgetting the documents.** Retention is released before the as-builts and
  manuals have arrived.
- **No defects record.** At the end of the defects period, nobody can show
  what was notified and what was fixed.

## What to check before signing

- What proportion of each bill is retained, and is there an upper limit?
- What triggers each release, and what documents are conditions of it?
- Is a performance guarantee required, in what amount and in what format?
- Does the advance guarantee reduce as the advance is recovered?
- Do guarantee validity dates cover the full defects liability period, plus a
  claim period?
- Who arranges extensions if completion is delayed?
- Can a retention bank guarantee replace cash retention?

A design-and-build contractor should be able to show these terms set out in
one place before the contract is signed, not discovered on the first running
bill.

## Standards referenced

The definition of a contract of guarantee and compensation for breach under
the **Indian Contract Act, 1872**; method of measurement of building works in
**IS 1200**, relevant where retention is deducted from measured running bills.
The amounts, wording, release conditions and legal effect of retention and of
any bank guarantee depend on the specific contract and the guarantee document,
and must be confirmed with the client's legal adviser.

## Frequently asked questions

### What is retention money in a construction contract?

It is a portion of each running bill that the client keeps back instead of paying, as security that the contractor will complete the work and make good defects. The proportion, any upper limit and the release points are set by the contract and vary between contracts. It is the contractor's money held by the client, not a discount.

### When is retention money released?

Commonly in two stages: part at practical completion, and the balance at the end of the defects liability period once notified defects have been made good. Some contracts add conditions, such as delivery of as-built drawings and operation and maintenance manuals. The contract sets the triggers, so they should be read and agreed before signing.

### What is the difference between a performance bank guarantee and retention?

Retention is cash withheld from payments by the client. A performance bank guarantee is an undertaking by the contractor's bank to pay the client on the terms written in the guarantee. Both secure the contractor's obligations, and many contracts use both. Whether both are needed, and at what level, is a commercial decision, because each adds cost that is reflected in the price.

### Can a contractor give a bank guarantee instead of cash retention?

Many contracts allow it. The contractor provides a retention bank guarantee and the withheld cash is released, which helps the contractor's cash flow while the client keeps security. The guarantee's amount, validity and wording should match the retention it replaces, including the full defects liability period and a claim period after it.

### What happens if a bank guarantee expires before the defects liability period ends?

The client may be left without the security it was relying on. That is why the validity date, the claim period and the process for extension are worth checking when the guarantee is issued, not when it is needed. What rights the client has in that situation depends on the contract and is a question for its lawyer.

### Can the client invoke a bank guarantee for any reason?

What a guarantee allows depends on its wording, which may be conditional or payable on demand, and on the contract it supports. Invoking one has serious consequences for the contractor and the relationship, and challenges are decided on the facts. Both sides should take legal advice on the wording before it is issued and before any invocation.

## Sources

- Indian Contract Act, 1872 — Contract of guarantee (Section 126); compensation for breach of contract
- [IS 1200](https://standards.bis.gov.in/website/published-standards/department-wise) — Method of measurement of building and civil engineering works

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Source: https://hagerstone.com/blog/retention-money-and-bank-guarantees-in-fit-out-contracts