What Is Retention Money in Construction?
Retention is a percentage withheld from every progress payment (typically 5–10%) as security for the quality of the work, released at handover on the terms of the contract.
How it works
The employer withholds a percentage of each progress claim up to a stated cap. Half is normally released at preliminary handover and the balance after the defects liability period or at final handover. Some contracts allow it to be replaced by a bank guarantee, which frees the cash.
The financial effect
On a SAR 10 million contract with 10% retention, SAR 1 million is frozen until handover — a real financing cost that must be priced within the indirects, and whose balances must be tracked across projects for cash-flow purposes.
Managing it
Record the retention on every claim and the date it falls due for release, and ask for it the moment its conditions are met — a great deal of contractors’ money sleeps in retentions that everyone has forgotten.
Worked example
A monthly claim of SAR 800,000 with 10% retention and a 10% advance recovery nets only SAR 640,000 in cash — a reality your cash-flow forecast should show rather than discover.
FAQ
Is retention subject to VAT?
The VAT treatment depends on when the invoice becomes due under the regulations of the Zakat, Tax and Customs Authority — consult your tax accountant on the correct invoicing structure.
Can retention be replaced by a bank guarantee?
Many contracts allow it, and government contracts in particular. It frees the cash against the cost of the guarantee — a financing trade-off worth calculating.
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