The UK Retention Deposit Scheme is an independent scheme for the protection of retentions under construction contracts.
We provide segregated bank accounts for construction retentions under standard-form and bespoke construction contracts in England and Wales.
The UK’s use of construction retentions is neither unique nor inevitable. While the practice is widespread among common law countries, its form, regulation, and reform vary significantly. Exploring international practices reveals how other jurisdictions have tackled the same challenges: namely, securing project completion and defect rectification while protecting subcontractors from unfair withholding or upstream insolvency.
Over the past two decades, reforms in Australia, New Zealand and Canada in particular have attempted to ring-fence retention funds or replace them with alternative forms of security. These efforts have met with varying success but demonstrate a growing international consensus that the traditional, unsecured cash retention system is outdated. Comparative analysis allows the UK to draw on tested solutions, avoid pitfalls, and align with broader efforts to improve payment security and supply chain fairness.
Retention practices in Australia historically mirrored those of the UK: a percentage of progress payments (typically 5%) is withheld until project completion and the expiry of a defects liability period. However, growing concern over payment delays and contractor insolvency has led to significant legislative reform at the state and territory level.
In New South Wales, the Building and Construction Industry Security of Payment Act 1999 (NSW) introduced mandatory trust requirements. Since 2015, contractors holding more than $20,000 in retention money must deposit those funds in a dedicated trust account, with records made available for inspection by the NSW Building Commissioner. This trust mechanism ensures that retention funds are ring-fenced and not lost if the party holding them becomes insolvent.
Other states have introduced similar protections. For example, Queensland’s Building Industry Fairness (Security of Payment) Act 2017 includes provisions for Project Bank Accounts, under which retention funds and progress payments are managed through separate trust accounts for the benefit of subcontractors. Although implementation has been phased, and only applies to certain public projects, it signals a move away from unsecured retentions held by main contractors.
These reforms were motivated in part by high-profile insolvency events - such as the collapse of Walton Construction in 2013 - which left subcontractors unpaid, including for retention monies. The legislative response has been to increase accountability and transparency, making it unlawful in some jurisdictions to commingle retention funds with general business accounts.
New Zealand faced similar issues with non-payment of retentions in the wake of contractor insolvencies. In 2015, the Construction Contracts Amendment Act introduced a statutory requirement that all retention money be held on trust for the party from whom it is withheld.
The trust arises automatically when the money is retained, and the payer must keep it separate from other funds or secured by way of an appropriate financial instrument. Crucially, this protection applies regardless of whether the contract expressly states it, and the funds do not form part of the payer’s assets in insolvency.
However, enforcement has not been straightforward. A 2021 review by the Ministry of Business, Innovation and Employment (MBIE) found poor compliance, with many retention holders failing to meet their statutory obligations. As a result, the Construction Contracts (Retention Money) Amendment Act 2023 introduced tighter record-keeping, mandatory trust accounts, and penalties for non-compliance, effective from 5 October 2023.
Canada also mandates the holding of retention funds - referred to as statutory holdbacks - but with stronger legal safeguards than in the UK. For example, Ontario’s Construction Act requires owners and contractors to retain 10% of the value of the work until the lien period has expired, typically 60 days. These holdbacks are held in trust by operation of law.
This statutory trust mechanism gives subcontractors and suppliers a protected claim against the retained funds, and those funds are not available to creditors in an insolvency. In addition, the Construction Act introduces prompt payment and adjudication rules, with strict timeframes for dispute resolution and payment release.
Similar legislation exists in other provinces, although implementation varies. The general trend is toward statutory protection of withheld funds, with prescribed procedures for their release and enforcement mechanisms that strengthen subcontractor rights.
In the United States, retention practices vary widely by state and project type. Most public works contracts limit retentions to no more than 5%, and some states have adopted “prompt payment” laws mandating release of retention within a fixed period (e.g., 30–60 days) after project completion.
The Federal Acquisition Regulation (FAR) generally prohibits unnecessary withholding on federal contracts. Instead, the US federal government relies heavily on performance and payment bonds as security, which contractors must obtain from surety providers. These bonds protect clients and subcontractors alike, without requiring cash retentions.
However, performance bonds come with limitations:
- They involve additional cost, typically borne by the contractor (often 0.5–2% of contract value)
- The creditworthiness of the surety provider becomes a key risk
- And technical conditions in the bond wording may be used to deny or delay claims
These limitations mean that while bonds reduce pressure on working capital, they do not eliminate the risk of disputes at the point of enforcement—especially in insolvency scenarios or where complex documentation is required to prove a breach.
The reforms described above suggest a number of clear trends across common law jurisdictions:
- Statutory trust mechanisms are increasingly used to ring-fence retention funds, protecting them from misuse or insolvency.
- Mandatory release periods and prompt payment laws are standardising the timeline for releasing withheld amounts.
- Alternative forms of security - such as retention bonds, performance bonds, or escrow arrangements—are gaining favour, particularly on larger projects.
That said, these alternatives are not without cost or complexity. Bonds and guarantees, while avoiding the need for cash retention, require contractors to obtain creditworthy issuers and often come with strict conditions. In practice, they may not always deliver timely or effective remedies if things go wrong. These limitations must be weighed carefully in any reform process.
Unlike common law systems, civil law countries tend not to use retentions in the same way. Instead, they typically rely on performance guarantees, insurance products, and contractual penalties.
In France, retentions are permitted but tightly regulated. The Code Civil allows a maximum of 5% of the contract price to be withheld as a guarantee for defects. This is typically released within one month of final acceptance, or earlier if the contractor provides an equivalent guarantee (e.g., a bank or insurance bond).
The retention amount must be stated explicitly in the contract, and abuse of the mechanism may give rise to legal challenges. The French system places greater emphasis on formal acceptance procedures and decennial liability, which makes long-term insurance-backed warranties a more common method of protecting clients.
Germany generally avoids the use of cash retentions. Under BGB (German Civil Code), contractors are not obliged to accept retentions unless contractually agreed. Instead, clients typically request bank guarantees (Bürgschaften) or insurance-backed bonds to secure performance.
These guarantees are strictly regulated, and enforcement is usually limited to clear cases of breach. Because the civil law tradition places a higher burden on written contracts and statutory liabilities, the perceived need for retained funds is less acute.
The broader lesson from civil law systems is that project security can be achieved through predictable enforcement mechanisms, without necessarily depriving contractors of working capital. However, these systems also rely on effective courts, clear contract drafting, and strict professional standards, which may be less consistent in fragmented or high-volume markets.
Several clear insights emerge from the comparative picture:
- Unsecured retentions are increasingly seen as outdated and high-risk, particularly in the context of contractor insolvency.
- Statutory trust models (as in New Zealand and Ontario) provide effective protection for subcontractors without requiring immediate abolition of retentions.
- Ring-fencing and record-keeping obligations improve transparency and reduce opportunities for abuse.
- Prompt payment and mandatory release schedules help eliminate unnecessary delays.
- Alternative securities, including bonds, offer flexibility - but they are not perfect substitutes. Their cost, conditionality, and reliance on issuer solvency must be weighed carefully.
Importantly, none of the jurisdictions examined has adopted a one-size-fits-all solution. Some retain cash retentions with added protections; others have moved to trust-based systems; and a few favour elimination in favour of insurance-backed alternatives.
The international trend is clear: traditional cash retentions held without protection are no longer considered best practice. Whether through statutory trusts, escrow mechanisms, or reliable alternatives like retention bonds, governments and industry bodies are rethinking how to balance payment fairness with performance assurance.
For the UK, this provides a rich set of tested models. Reform need not mean abandoning all client protections - it means putting in place mechanisms that are transparent, enforceable, and fair to all parties in the supply chain.
By learning from the successes and shortcomings of other jurisdictions, the UK can avoid repeating old mistakes - and finally modernise a practice rooted in the 19th century for the needs of a 21st-century industry.
We don't lend, invest or leverage your retentions. We simply hold all deposits in full and unencumbered at the Bank of England, always keeping them fully available on demand.
Retentions are safeguarded and protected from the trading activities of any underlying bank, meaning that even if the worst happens to a bank, or there is a run on its funds, or even if anything happens to us, your retentions are 100% secure.