From Victorian Railways to Modern Construction: The History of Retentions

Retentions – the practice of withholding a portion of payment on construction contracts until certain conditions are met – have a long and contentious history.

This practice began in the United Kingdom during the Victorian era and remains common in modern construction projects. Over time, retentions evolved from a simple safeguard against contractor default into a standard contractual mechanism aimed at ensuring quality and rectifying defects.

Yet, throughout their history, retentions have attracted criticism for the financial strain they place on contractors and the adversarial relationships they can foster. This article traces the development of retentions from their 19th-century origins to their 21st-century controversies, drawing on historical records, industry reports, and legal developments to illuminate how a Victorian solution became a modern-day dilemma.

How did retentions in construction contracts begin during the Victorian railway boom?

The concept of retention in construction can be traced back to the great Victorian railway boom of the 1840s. During this “Railway Mania,” Britain undertook a massive expansion of its rail network, with a frenzy of new companies and contractors rushing to build lines across the country. Many of these early contractors were small or inexperienced firms eager to capitalise on booming demand. However, the period was marked by frequent instances of contractors failing to complete works or becoming insolvent mid-project. To protect themselves from the financial risk of unfinished work, railway companies began the practice of withholding a percentage of payments – often a minimum of 20% of the contract value – as security against contractor default.

This withheld sum could then be used to hire others to complete the job or remedy defects if the original contractor could not do so. In essence, the first retentions were a form of self-insurance for project owners, intended to ensure project completion and guard against the “cowboy” builders of the era who might otherwise abandon a job or deliver substandard work. The early rationale for retentions was thus rooted in the economic realities of Victorian infrastructure projects. By holding back a substantial portion of payment until a project was satisfactorily delivered, clients gained leverage to keep contractors focused on finishing the work. If a contractor failed, the retained money provided a fund to pay for completion by others.

Contemporary accounts from the railway construction boom indicate that insolvency and speculation were rampant, lending credence to the need for financial safeguards. Over time, this novel payment mechanism proved effective enough that it quickly spread beyond railway projects. By the late 19th century, the “retention fund” had been adopted in other large Victorian engineering endeavours and public works as a routine precaution to manage contractor performance and financial risk. The concept had become an established feature of construction contracts – an enduring legacy of the railway age that would persist well into the future of the building industry.

How did retention practices spread and become standard in construction?

From its beginnings in the rail sector, the practice of retentions evolved and broadened to the wider construction industry in the latter half of the 19th century.

As Britain undertook vast infrastructure and civic building programs – from bridges and sewers to grand public buildings – project owners saw similar benefits in withholding final payments to ensure quality and completion. By the mid-19th century, retentions had “become standard practice throughout the construction sector”, serving not only as assurance of project completion but also as a protection against defects discovered after a project was declared finished.

In other words, the retention mechanism was refined to address issues of workmanship: a portion of payment would be held back even after the contractor finished the job, to be released only after a defect liability period (also called a maintenance period) had passed with all faults rectified. This two-stage release – part of the retention released upon practical completion and the remainder after a set post-completion period – became a staple of construction contracts.

By the early 20th century, most formal building and engineering contracts in the UK included retention clauses as a matter of course. Standard forms of contract began to codify retention provisions, typically setting the retained sum at around 5% of the contract value (with higher percentages on riskier projects).

For example, under common arrangements, interim progress payments to the contractor would be subject to a 5% deduction, accumulating into a retained fund. When the works achieved practical completion (meaning the building or infrastructure was usable and mostly defect-free), the contract would call for half of the retention money to be released to the contractor. The remaining half would continue to be held during the defects liability period – often 6 to 12 months – and only upon the contractor remedying any defects that arose in that time would the final portion be paid out. Such terms were “enshrined in the majority of the construction industry’s standard forms of contract” by the mid-20th century.

Retention thus became an entrenched institution in construction contracting, employed by both public sector clients and private developers as a routine risk management device. The justification for these practices was straightforward in theory. Retentions provided a readily available fund to fix problems: if minor defects or incomplete items (“snagging” issues) were found at handover, the client could withhold money to incentivise swift corrections, or ultimately pay another party to make good if the original contractor failed to do so. Retention was also seen as a buffer against over-payment in the periodic valuation of work – a hedge for the employer in case the work completed was over-estimated during construction.

By withholding a small percentage, the client had a cushion to cover any shortfall if the contractor was overpaid for work that later turned out incomplete or defective. Additionally, even as the construction market matured with more established contractors, concerns about insolvency did not disappear. Particularly in volatile economic times, a retention fund offered some protection if a builder went bankrupt before finishing the work or returning to fix defects.

In summary, by the modern era retention had become a multi-purpose tool: part security for performance, part incentive for quality, and part financial buffer in a complex payment process unique to construction.

What early criticisms arose regarding the use of retentions?

Although retentions were widely adopted as a form of security, they were not without critics. From early on, contractors resented the practice as an unfair withholding of money they had already earned, and many argued it created adversarial rather than collaborative relationships. However, for much of the late 19th and early 20th centuries, these complaints were muted by the dominance of clients in setting contract terms and the lack of formal industry recourse.

It was in the post-World War II period – an era of re-examining construction efficiency – that significant formal criticism of retentions emerged. A landmark moment was the Banwell Report of 1964, a government-commissioned review of UK construction procurement. In his report, Sir Harold Banwell identified retentions as a problematic, outmoded practice and recommended that retentions should be abolished.

Banwell’s committee concluded that the perceived benefits of retentions did not outweigh their downsides, especially in an industry striving to modernise and improve collaboration. The Banwell Report’s critique was pointed: it noted that withholding funds from contractors caused “immense harm to the competitiveness and viability” of small and medium-sized firms, which form the vast majority of the construction supply chain.

Retentions were seen as undermining contractors’ cash flow and profitability, effectively making smaller suppliers finance projects for the client. Banwell also argued that retentions detracted from performance – a demotivating factor rather than an incentive – and that progressive procurement methods could better assure quality without penalising contractors.

In the context of the 1960's, with increasing emphasis on long-term relationships and professionalism in construction, the report deemed retentions a relic of a bygone era: “outmoded” in an industry moving towards teamwork, and having “no place in a modern construction industry” premised on advanced skills and mutual trust.

While Banwell’s call for abolition in 1964 was not heeded immediately, it was the first major official acknowledgment that the retention system carried significant drawbacks. Throughout the later 20th century, discontent with retentions continued to simmer. Contractors frequently complained of late and partial release of retention monies, or spurious reasons given by clients to avoid payment altogether. Specialist subcontractors – who often rely on timely cash flow from finished jobs – were particularly vulnerable, as retentions cascaded down from main contracts into sub-contracts. If a main contractor or client delayed releasing retention, the smaller firms at the bottom of the chain suffered the consequences. These issues gave rise to the description of retentions as a “necessary evil” or even a “pernicious device” in industry commentary.

By the 1970's and 1980's, as construction projects grew in scale and complexity, the practice of retentions was increasingly seen by many contractors as an institutionalised withholding of payment that could be open to abuse. Some unscrupulous clients treated retention funds as interest-free capital, or worse, looked for excuses to retain payment indefinitely. Yet, despite the disapproval, virtually all major projects continued to employ retentions, and efforts to eliminate them outright had little success for decades after Banwell’s recommendation. This tension set the stage for further reform efforts in the closing years of the 20th century.

How did retentions feature in late 20th-century construction reform efforts?

By the 1990's, the construction industry was undergoing soul-searching reforms aimed at improving efficiency and collaboration. Retentions, as a symbol of mistrust in the contractor–client relationship, drew renewed scrutiny during this period. In 1994, Sir Michael Latham’s influential report “Constructing the Team” once again put the spotlight on retentions.

Latham was highly critical of the practice, echoing earlier concerns that retentions damaged cash flow and relationships without demonstrable benefit to quality. He recommended that retention funds be replaced by alternative forms of security, such as retention bonds, and urged that standard contracts be reformed so that the use of cash retentions would no longer be the default.

In Latham’s view, clients could obtain the necessary performance guarantees through bonds or warranties, which would be less onerous for contractors, and legislation could be used if necessary to underpin this change. This recommendation signalled an intent to phase out the Victorian practice at last – Latham even envisioned the industry eliminating retentions by the end of the 1990's.

Following Latham’s report, the UK Parliament took up the broader issue of unfair payment practices in construction. The result was the Housing Grants, Construction and Regeneration Act 1996, often called the Construction Act, which fundamentally changed construction contracts across Britain. Although the Act did not ban retentions, it addressed some abuses associated with them. Notably, the 1996 Act introduced requirements for prompt interim payments and the right to adjudication for disputes, meaning a contractor could quickly challenge the non-release of retention money.

It also outlawed “pay-when-paid” clauses, which had sometimes been used to justify not paying a subcontractor’s retention until the main contractor was paid theirs by the client. After the Act, a main contractor could no longer withhold a subcontractor’s due payments on the excuse that the client had not yet released the main contract retention (except in cases of upstream insolvency, which the law allowed).

In practice, this began to sever the link between a subcontractor’s payment and the overarching project’s payment events, mitigating one of the unfair aspects of the traditional retention cascade. Later amendments to the Act in 2011 strengthened these provisions, explicitly preventing conditional payment regimes that tied subcontractors’ retentions to the completion of the entire project or certification by a third party. Thanks to these changes, for example, a subcontractor who finished their portion of work on a large project must now have half their retention released at their own work’s completion, rather than waiting until the very end of a multi-year project over which they have no control.

While these legal reforms stopped short of eliminating retentions, they sought to curb the worst payment abuses and inject greater fairness and certainty into the system. At the same time, industry-led initiatives were pushing cultural change. The Egan Report of 1998 (“Rethinking Construction”) promoted principles of collaborative working and zero defects targets, implying that in a more modern, partnered supply chain the need for retentions should be re-examined. Some progressive clients took this to heart.

During the late 1990's and early 2000's, a number of major public clients and private developers piloted “no retention” policies on high-profile projects. For instance, BAA (the British Airports Authority) notably delivered the Terminal 5 project at Heathrow Airport under a contract model that did not withhold retentions, instead relying on integrated teams and trust-based performance incentives. Similarly, government frameworks like certain NHS Trust hospital building programs and the Highways Agency began to experiment with dropping retentions in favour of alternative safeguards.

The Highways Agency’s procurement director in 2002 even set out an objective of phasing out retentions by 2007 on their projects, reflecting a belief that modern procurement methods (such as partnering and target-cost contracts) made retentions unnecessary. These efforts were part of a broader movement in the early 21st century to improve payment practices and supply chain relationships, under initiatives like the “Accelerating Change” report of 2002 and the Construction Best Practice Programme.

Despite these encouraging examples, industry progress was uneven. Many public authorities and private sector clients continued business-as-usual with retentions, either unaware of the new guidance or unconvinced that giving up retentions was prudent. In some specialised sectors, subcontractors attempted to force change by collective action.

Trade associations representing certain trades – for example, the British Constructional Steelwork Association (BCSA) for steel frame contractors – introduced rules prohibiting their member firms from accepting contracts with retention clauses. The idea was to eliminate retentions by united refusal: if all competent firms in a sector refused to agree to retentions, clients would have to use alternatives like bonds. In 1999, the Lift and Escalator Industry Association (LEIA) similarly resolved that its members would not enter contracts with cash retentions, and the Federation of Piling Specialists (FPS) adopted a “zero retention” policy in the early 2000s.

However, these well-intentioned collective moves met a swift obstacle in the form of competition law. The UK Office of Fair Trading (OFT) investigated such agreements and found them to be anti-competitive – essentially a form of collusion among suppliers to impose contract terms. Under pressure from the OFT, the trade bodies formally rescinded their no-retention policies by 2003, though many member companies remained individually committed to negotiating contracts without retentions whenever possible.

This episode illustrated the difficulty of orchestrating industry-wide change: retentions were so embedded in practice that only legislative or very concerted action could dislodge them, yet collective action by contractors ran afoul of other regulations. Thus, as the new millennium arrived, retentions stubbornly endured, even as leading figures in the industry continued to call for their overhaul.

What role did the 1996 Construction Act and other laws play in retention practices?

Given the slow pace of voluntary change, stakeholders increasingly looked to legislation to address the retention issue. The Construction Act 1996 (and its amendments in 2009/2011) was a pivotal legal development, not by banning retentions but by regulating payment processes around them. Under the Act’s framework, any party withholding payment (which includes holding a retention) must issue a notice stating the amount and reason for withholding, failing which the full amount becomes due.

This requirement for transparency – introduced in 1998 and toughened in 2011 – discouraged the capricious withholding of funds and ensured that contractors knew exactly what was being retained and why. It also gave contractors an immediate right to adjudicate if a retention was wrongly withheld or not released when due, providing a quick legal remedy in what had previously been a source of lengthy disputes. Furthermore, as noted, the 2011 amendments to the Act closed loopholes that allowed “pay when certified” arrangements to delay subcontractors’ retention payments.

Now, the law mandates that retentions owing to subcontractors must be released in line with their own contract milestones, independent of the payer’s situation on other contracts. In effect, UK law has stepped in to prevent some of the unfair domino effects that retentions can have down the supply chain.

Beyond the Construction Act, Parliament has considered more direct intervention specifically on retentions. Over the past decade, there have been several attempts to pass legislation that would radically reform or eliminate the practice. In 2017, following high-profile contractor insolvencies and persistent lobbying by industry groups, a Private Member’s Bill – the Construction (Retention Deposit Schemes) Bill 2017-19 (often called the “Aldous Bill” after its sponsor, Peter Aldous MP) – was introduced in the House of Commons.

This Bill proposed that any retention monies under a construction contract should be held in a statutory deposit scheme, rather like tenant deposits in the housing sector, to protect subcontractors from losing their retentions if the party holding the money became insolvent. The initiative had cross-industry support, reflecting growing concern after the collapse of Carillion in 2018 which left a trail of unpaid retentions to subcontractors. However, despite several readings, the Bill was stalled and ultimately lapsed due to a lack of Parliamentary time (in part because Brexit and other matters dominated the legislative agenda in 2018–2019).

A similar fate met earlier proposals, such as a 2015 amendment put forward to require trust funds for retentions, and a 2017 Scottish Parliament consultation on retentions. Most recently, in 2021, a draft Construction (Retentions Abolition) Bill was introduced in the House of Lords by Lord Aberdare. This bold proposal seeks to amend the 1996 Construction Act to prohibit the practice of cash retention altogether, setting a deadline for the industry to transition to other forms of security or assurance.

It represents the most direct legislative challenge yet to the retention system. As of the time of writing, the Retentions Abolition Bill has brought renewed focus and debate, though it remains to be seen if it will be enacted. The very existence of such a Bill is telling: it underscores that, over 180 years since retentions first appeared, lawmakers are still grappling with how to balance client protections against the need for fair payment. In the meantime, the status quo remains – retentions are lawful under English law (subject to the payment rules of the Construction Act), and they continue to be incorporated into most construction contracts by default.

Any fundamental legal reform, whether creating ring-fenced retention deposit schemes or abolishing retentions outright, will depend on the outcome of ongoing political discussions. Thus far, the legislative approach has been incremental, addressing symptoms (like non-payment and insolvency risk) rather than striking at the root of the practice.

Why do retentions remain controversial in the modern construction industry?

The persistence of retentions into the 21st century has kept alive many of the same criticisms that have been voiced for decades – even centuries – about this practice. Chief among these is the financial strain on contractors and subcontractors. Retentions effectively mean that contractors do not receive full payment even for satisfactorily completed work until months or years later.

This withheld cash can create liquidity pressures, especially for small firms operating on thin margins. Modern industry surveys show that billions of pounds can be tied up in retention at any given time. In fact, between 2015 and 2018 it was estimated that £8 billion of retention money was outstanding and unpaid across the UK construction sector. Alarmingly, a significant portion of this is never recovered by the contractors: almost half of businesses surveyed in that period experienced non-payment of retention due to upstream insolvency (for example, a client or main contractor becoming insolvent before releasing the retention), with an average of £79,900 lost per contract where this occurred.

High-profile collapses like Carillion (2018), Interserve (2019) and ISG (2024) have illustrated the risk starkly – subcontractors who had completed their jobs to standard found their retention funds vanished into an insolvency black hole, essentially financing the failed company’s debts. This outcome is painfully reminiscent of the Victorian rationale for retentions (guarding against contractor default), but in reverse – now it is the contractors who suffer when those holding the money default.

For many, this flips the original logic of retentions on its head and is cited as evidence of a fundamentally unjust system. Another longstanding criticism is that retentions do not necessarily improve quality or reduce defects, despite being intended as leverage for that purpose. A 2002 House of Commons inquiry found little evidence that projects with retentions had fewer defects; indeed, some projects executed without retentions (often under partnering arrangements) reported better outcomes.

The inquiry heard testimony suggesting that a collaborative ethos – where contractors are motivated by reputation and the promise of future work – can achieve high quality without the need to hold a “sword of Damocles” over their payments. Moreover, the amount of retention (commonly 5%) is often too small to cover the cost of serious defects or contractor failure, meaning it may be an inadequate remedy for the client while still being a significant burden for the contractor. Critics argue that there are more effective and equitable methods to ensure performance: for example, performance bonds, latent defects insurance, or parent company guarantees can address insolvency and defect risks without depriving the supply chain of working capital.

Many of these alternatives are already widely used alongside or in place of retentions in sectors like commercial property development and international projects, suggesting that retentions are not the only tool available to manage contractor performance. The practice is also seen as anachronistic in an era when the construction industry is striving for integration, trust, and digital efficiency. Detractors frequently label retentions as a “Victorian” mechanism that has outlived its usefulness.

Indeed, over the years, numerous government and industry reports – from Banwell (1964) to Latham (1994) to Egan (1998) to the Parliamentary inquiry of 2002 – have all concluded that change is required in the way the industry secures project delivery and quality. Each of these reports envisioned a future with either no retentions or a reformed system, yet the practice endures. Part of the difficulty is cultural: many clients remain reluctant to let go of their “pot of ready money” that a retention represents.

Especially for one-off or inexperienced clients, holding a retention feels like a safety net – a straightforward, if blunt, instrument to ensure the contractor returns to fix any shortcomings. From the client’s perspective, the retention can provide peace of mind, and some argue it instills discipline in contractors who might otherwise be less diligent once paid in full. These views have made some employers resistant to change, even as enlightened clients voluntarily move away from retentions. In the modern professional environment, the retention system’s adverse impact on industry relationships is increasingly seen as contrary to best practice.

Retentions inject a measure of distrust into contracts from the outset: the client signals it does not wholly trust the contractor to perform, and the contractor must finish the job knowing a slice of payment is being withheld regardless of performance. This dynamic can sour goodwill and, as studies have indicated, contribute to adversarial attitudes. Specialist contractors often feel they are effectively financing the project, subsidising the cash flow of those above them in the chain.

The fact that many hesitate to demand their retention for fear of jeopardising future work (not wanting to “rock the boat” with powerful clients or main contractors) highlights a power imbalance. Over time, these issues have remained remarkably consistent. In the Victorian era, retentions addressed one problem (contractor default) but created another (tension and hardship for contractors); in today’s industry, the cast of characters and contract values have changed, yet the fundamental debate – security versus fairness, protection versus collaboration – continues along similar lines.

What is the legacy of retentions and the outlook for the future?

The long history of retentions in construction is a story of an idea that was highly effective for its original purpose, yet fraught with side effects that have led to repeated calls for its reform or repeal. On one hand, the longevity of the retention system speaks to its practical utility: it provided Victorian railway barons a solution to rogue contractors, and it continues to give modern clients a measure of confidence that unfinished work or defects can be dealt with.

Countless projects have reached completion with the help of retention money as leverage, and many clients (especially in the public sector) still view it as a prudent safeguard of taxpayer or investor funds. On the other hand, the accumulated weight of experience and analysis over the years has been largely against the retention system. From 19th-century contractors grumbling in pubs about withheld guineas, to formal government reports declaring the practice antiquated, the criticism has been persistent: retentions distort cash flow, strain client-contractor relations, and may not even achieve their intended goal of higher quality.

The construction industry’s evolution – with stronger firms, better oversight, and alternative risk management tools – has gradually eroded the original rationale for retentions. Modern contractors are often vetted for financial stability and technical ability, performance bonds are routine in large projects, and collaborative contracts are increasingly common; in such a context, holding a fixed percentage of payment can be seen as a crude instrument of a bygone age. As of today, retentions remain in a state of flux.

The practice is still widespread but under unprecedented scrutiny. Industry bodies and alliances have launched initiatives (such as the “Zero Retentions” roadmap backed by major contractors and the UK government, and the UK Retention Protection Pledge backed in the private sector) aiming to eliminate retentions by the mid-2020s, replacing them with trust funds or prompt payment mechanisms. Legislative pressure is mounting, evidenced by the recent bills in Parliament seeking to mandate protected retention deposits or abolish retentions entirely.

Even without new laws, there is a gradual trend of more clients, especially large repeat clients, opting to reduce or waive retentions to encourage better partnership with their supply chains. In some cases, clients now offer contractors the option of a retention bond (a bank-guaranteed security) in lieu of cash retention, which achieves the security goal while letting contractors keep their cash – an idea remarkably similar to what Sir Michael Latham advocated back in 1994.

Meanwhile, a few other countries have moved ahead with reforms – for instance, parts of Australia have enacted statutes requiring retention money to be held in trust accounts, just like the UK Retention Deposit Scheme – providing examples that British policymakers are watching closely.

In conclusion, the journey of retentions from the Victorian railways to modern construction sites is a testament to how practices can become deeply embedded, even as attitudes towards them shift. Retention in construction began as an innovative solution during a 19th-century boom; it evolved into a conventional contract clause, almost taken for granted, throughout the 20th century; and it has now become a focal point for reform in the 21st century.

Understanding this history is vital for construction professionals, academics, and policymakers as they weigh the future of retentions. The story reveals not only why retentions were adopted and how they functioned, but also why they have been so difficult to replace. As the industry moves forward, grappling with new challenges of productivity, sustainability, and resilience, the retention question remains: is this 180-year-old practice still fit for purpose, or will it finally be consigned to history in favour of fairer and more modern alternatives?

The coming years may finally deliver the answer that generations of engineers, builders, and legislators have sought, bringing this long historical chapter to a close.