Retention in Construction Contracts: Get Your 5% Back

Retention in construction contracts is money you have already earned that the client keeps hold of — normally 3 to 10 per cent of every payment — as security that you will come back and fix defects. Under a UK JCT contract it is typically 3–5 per cent: half released at practical completion, the rest at the end of the defects liability period, usually 12 months later. In Sweden the same money is called innehållna medel, held until the works are approved at slutbesiktning (final inspection), sometimes with a slice kept on into the garantitid (guarantee period). It is still your money and still a receivable on your balance sheet. But it does not release itself: nobody in the client's finance office has a reminder set for the day it falls due. If you do not track it and invoice it, it ages quietly until someone argues it away.

Retention, defect withholding and set-off are three different things

Three deductions turn up on remittances and get muddled into one. They behave differently:

• Retention (innehållna medel) — an agreed percentage of every payment, held for an agreed period. It releases on a date or an event, and requires no fault on your part.
• Defect withholding — an amount matching the cost of putting right specific defects recorded at inspection. Under AB 04 chapter 6, this is defect-specific and proportionate, not a blanket percentage. It releases when the defect is signed off.
• Set-off — a deduction for something the client says you owe: liquidated damages (vite), backcharges, skips, scaffold hire. That is a claim against you, with its own notice rules.

Only the first releases on a calendar date. If a main contractor says your retention is being held because of a dispute, that is not retention, it is a set-off, and it needs answering as one. Make them say which it is, in writing.

How much a client can hold, and for how long

Australia runs around 5 per cent, shaped by state security-of-payment rules. The pattern is the same everywhere: a percentage, two release points, and a long tail. The tail is the problem. Retention withheld in March on a job finished in August is money you typically do not see for another year — and that is when everything goes right.

What AB 04 and ABT 06 actually say about retention

Worth reading even outside Sweden, because the logic applies to any standard form.

AB 04 and ABT 06 — the Swedish standard construction terms, roughly the equivalent of JCT — set no standard cash retention percentage. Their default security mechanism is a guarantee, not withheld cash. Under AB 04 chapter 6 § 21 the contractor provides security of 10 per cent of the contract sum during the construction period and 5 per cent for the first two years of the guarantee period — normally a bank guarantee, not the client sitting on your cash.

So when a Swedish main contractor deducts 5 or 10 per cent as innehållna medel, that is a deviation, imported through the administrative provisions (the AF documents, usually the AFC.6 or AFD.6 series). Two consequences: it is negotiable at tender stage, because it is not part of the standard terms you are both signing; and your real terms are in the AF section and nowhere else.

Two other provisions decide whether you ever see the money. Chapter 6 § 15: the final invoice (slutfaktura) must be submitted within six months of the works being approved, and claims left out of it can be lost. Check the edition you signed — this deadline kills real money every year. The guarantee period: five years for the contractor's work, two years for material and goods the client specified, with liability running to ten. If someone proposes holding cash across the full five years, that is not standard. Price it or refuse it.

Retention usually costs more than your profit on the job

Take a job at 400,000 SEK (about £30,000). A well-run subcontractor might make 6 per cent net: 24,000 SEK. A 5 per cent retention is 20,000 SEK. So roughly 83 per cent of your entire profit on that job sits in someone else's account for a year or more. You have paid the wages, the wholesaler and the van. They are holding the bit you did it for.

Now the rolling number. Invoice 6 million SEK a year of retention-bearing work at 5 per cent and 300,000 SEK goes out annually. With a 12- to 18-month release lag, expect 300,000–450,000 SEK permanently outstanding — a van and a month of wages, funded by you. Five per cent held for 24 months at a 9 per cent cost of borrowing is about 0.9 per cent of job value. If a contract holds retention for two years, put it in the price.

How to track retention so it does not quietly disappear

Retention vanishes in four ways, all administrative rather than legal: the deduction lands on a remittance and is never recorded; it is recorded with no due date, so nothing prompts you; the company holding it is sold or wound up first; or the release trigger — the making good certificate, the godkänd slutbesiktning — is never issued, because nobody asked.

Build a retention register. One row per contract:

• Client, contract reference, and the named person who authorises release
• Contract value, retention percentage, cumulative amount retained
• Trigger 1: practical completion / slutbesiktning — date, amount due, invoice number, paid date
• Trigger 2: end of defects or guarantee period — the same four columns
• The evidence: inspection report, completion certificate, signed self-inspection records

Then five habits:

1. Reconcile every remittance the day it lands. A short payment is either retention (record it) or a dispute (raise it inside the notice window). Never "later".
2. Diarise both release dates the day retention first appears, not the day the job finishes. You already know them.
3. Invoice retention, do not request it. A dated invoice starts a payment clock and accrues statutory interest. An email does neither.
4. Chase 14 days before the due date, not 30 days after, so release is already in their payment run.
5. Reconcile the register to your ledger monthly. Retention that lives only in a spreadsheet is invisible in every cash-flow forecast you make.

The awkward part is evidence, two years on. Release needs the inspection report, dated photos of the snags closed out and the signed self-inspection records — findable in minutes, not scattered across three phones and a WhatsApp group. That is the practical case for running jobs in one system: in OdinTask the quote, variations, self-inspection protocol, site photos and invoices sit on the same job card, and the Fortnox or Visma sync keeps the retained balance visible in your books.

How to get retention released

1. Ask for the trigger document in writing, on the day the trigger happens. In Sweden, call for the slutbesiktning; the inspector's report is the document. In the UK, ask for the certificate of practical completion or the making good certificate. Do not accept "we'll have a walk round".
2. Close the snag list and evidence it. A defect you cannot prove is fixed is a defect that is still open.
3. Send a dated invoice for the retained amount, trigger document attached, addressed to the person who authorises it.
4. Put the interest line on the invoice. In Sweden, late payment interest is the reference rate plus 8 percentage points under räntelagen. In the UK it is base rate plus 8 per cent under the Late Payment of Commercial Debts (Interest) Act 1998. Both are statutory; you do not need permission.
5. Escalate on a schedule, not on a mood. Named contact, then their commercial manager, then a formal demand — a betalningsföreläggande through Kronofogden in Sweden. In the UK, adjudicate under the Housing Grants, Construction and Regeneration Act 1996: roughly 28 days to a decision, and that right cannot be contracted out of.

The letter that works is short and factual:

Retention release, contract [ref], our invoice [no]. Practical completion was achieved on [date]; certificate attached. [Amount] of the retained [total] falls due today. Please confirm the payment date by [date + 7 days]. Statutory interest applies from [date + 30 days].

Bank guarantee instead of letting cash sit for years

There is a straight swap available and most small firms never ask. Instead of the client holding your money, your bank or insurer issues a guarantee — a bankgaranti in Sweden, a retention bond in the UK — for the same amount. The client has identical security. You keep the cash. Under AB 04 this is not a favour: the guarantee is the standard mechanism, cash retention the deviation.

• Ask at tender stage. Nobody swaps retention for a guarantee once deductions have started.
• Get the fee in writing. It is quoted as an annual percentage of the guaranteed sum and depends on your accounts. If it costs less than borrowing the same money, take the guarantee.
• Check on-demand versus conditional. An on-demand guarantee can be called without the client proving anything; a conditional bond requires them to demonstrate a breach. Very different risks, similar price.
• Know what it blocks. A guarantee usually ties up the same amount of your credit line. The benefit is real but not free.

The tax bit: you are taxed before you are paid

Retention is revenue when the work is done and invoiced, not when the cash arrives. Under Swedish K2 accounting a fixed-price contract is recognised on completion, and the retained 5 per cent is part of that revenue. Corporation tax falls due on money the client is holding.

VAT usually does not bite the same way. In Sweden, construction services between construction businesses fall under omvänd skattskyldighet (reverse charge), so you charge no moms on the subcontract invoice — the client accounts for it. The UK has the same shape through the CIS domestic reverse charge, in force since March 2021. Where reverse charge does not apply, a private client for instance, you account for VAT on the full invoice, retained portion included. Confirm your position with Skatteverket.

Book retention in its own ledger account rather than burying it in trade debtors. Your debtor days stop looking like a disaster, and you get one number for money you have earned and cannot spend. It is usually bigger than firms expect. Do not write old retention off because it looks ugly — a write-off is the client's best possible outcome.

Retention is not really a legal problem. It is a memory problem with a legal deadline attached. Track it from the first deduction, invoice it the day it falls due, and swap it for a guarantee whenever you can. If you want the job records, protocols and invoices in one place so a release request two years on takes five minutes, try OdinTask free for 14 days.