Retention Money in Government Contracts: A Complete Guide

What Is Retention Money?

Retention money is typically 10% of each interim payment withheld by the employer until the practical completion of the works. Once practical completion is certified, 50% of the total retention (i.e., 5% of the contract value) is released. The remaining 50% is held until the end of the Defects Liability Period (DLP), typically 12 months after practical completion.

Using a simple example: on a R5 million contract with 10% retention, the employer will withhold R500,000 over the course of the project. At practical completion, R250,000 is released. The final R250,000 is released 12 months later, assuming no outstanding defects.

Retention Under JBCC Contracts

The JBCC (Joint Building Contracts Committee) suite of contracts, which is the most widely used in South African government building contracts, uses 10% retention as the default. The JBCC Principal Building Agreement provides for retention in the payment certificate process.

Some JBCC contracts allow the contractor to replace retention money with a retention guarantee (bank guarantee for the retention amount). This releases the cash to the contractor while providing the same security to the employer. Not all employers accept this substitution — check the specific contract conditions.

Cash Flow Implications of Retention

Retention creates a significant cash flow gap. If you are executing a R5 million contract over 12 months and invoicing R416,000 per month, retention means you are effectively only receiving R374,000 per month, with R500,000 locked up until practical completion and a further R250,000 held for an additional 12 months after that.

Factor retention into your tender pricing. If you need to finance the gap between your cash outlays and the reduced cash receipts during the project, you will need bridging finance or a strong balance sheet. The cost of this financing is a legitimate project cost that should be included in your overheads.

Protecting Your Right to Retention Release

To ensure timely release of retention, follow these steps: obtain a written Practical Completion certificate as soon as the works reach that stage; submit a formal written request for 50% retention release immediately after the certificate; document all defect rectifications during the DLP; submit a formal written request for final retention release on the last day of the DLP.

Employers sometimes delay retention release without justification. You have a contractual right to retention release upon meeting the conditions. If release is delayed unreasonably, you are entitled to claim interest on the retained amount (check the contract's interest provisions).

Retention in NEC and FIDIC Contracts

Government entities using NEC3/NEC4 contracts (increasingly common for large infrastructure projects, including water and transport) use a similar retention mechanism but may structure it differently. FIDIC contracts (used for some internationally-funded projects) typically use 5% retention with 50% released at Taking Over and the balance at the end of the Defects Notification Period.

Frequently Asked Questions

Related Guides

• Performance Guarantee Guide
• Cash Flow Management for Tenders
• Tender Bridging Finance