Retention bonds,
and what replaces cash retention.

A retention bond is a guarantee from a bank or insurer that takes the place of cash retention. Nothing is held back from the contractor’s payments. Instead the surety promises to pay the employer up to the retention sum if the contractor fails to meet its obligations. With the Commercial Payments Bill proposing a ban on cash retention, the bond is one of the alternatives the government has pointed to.

What a retention bond is

The surety issues the bond to the employer who would have held retention. The contractor who would have had it deducted arranges it and pays the premium. In return, the employer agrees not to deduct retention from interim payments.

The bond has a maximum sum, set to match the retention that would otherwise have been held. On a subcontract the same arrangement runs one tier down: the subcontractor takes out the bond in favour of the main contractor.

How a retention bond is released

The JCT publishes a standard retention bond, agreed with the British Bankers’ Association, for its 2016 main contracts and subcontracts. It mirrors the two halves of cash retention.

The maximum sum stays in place until the employer tells the surety that the next interim certificate after practical completion has been issued. It then falls by half. The surety is released altogether on the earliest of three events. They are the Certificate of Making Good, payment of demands up to the maximum, and a calendar date written into the bond.

That calendar date matters. A bond that expires before the defects period ends leaves the employer unprotected, so an employer is unlikely to accept one. A bond with no realistic end date stays on the contractor’s facility for longer than the job needs.

How a call on the bond works

On the JCT form, the employer claims by written demand to the surety, with its signatures authenticated by its own bank. The demand must state the retention that would have been held at that date, and the amount claimed cannot exceed it. It must say what the money is for:

• Costs from the contractor failing to follow the architect’s or contract administrator’s instructions, confirmed in a statement from them.
• Insurance premiums the employer paid because the contractor did not insure the works as required.
• Liquidated damages, with the certificate of non-completion.
• Loss and expense after the contractor’s employment is terminated.
• Other costs actually incurred that the contract lets the employer deduct.

The demand must also certify that the contractor was given 14 days’ written notice of the liability and did not pay. A demand that meets those requirements is conclusive evidence, for the bond’s purposes, that the amount is due. The surety pays first. Any argument about whether the employer was right comes afterwards, between employer and contractor.

A bond keeps the money with the firm that earned it. It does not keep the argument away.

On-demand and default bonds

An on-demand bond pays on a compliant demand, without the beneficiary proving a breach. A default bond, also called a conditional bond, pays only once the breach and the loss are established. The JCT form sits between them: it pays on demand, but only on a demand that ties the sum to named heads of claim and to 14 days’ notice.

For the firm taking the bond out, the wording decides the risk. A default bond with a clear expiry date carries far less exposure than a pure on-demand bond with an open end.

Retention bonds under NEC4

In the NEC4 Engineering and Construction Contract, retention is Option X16. Clause X16.3 lets the contractor give the client a retention bond, in the form set out in the Scope, in place of retention. The contract states one reason for refusing it: a provider whose commercial position is not strong enough. Refusing it for a reason the contract does not state is a compensation event.

What a retention bond costs

There is no published rate. The premium depends mainly on the contractor’s financial standing, so smaller firms pay more for the same cover. Research for the government by Pye Tait in 2017 found premiums of 1% to 10% of the bond value, with a minimum of around £750.

The Bill’s impact assessment assumed premiums of 3% of the retention sum for small firms, 1.8% for medium firms and 0.8% for large ones. It called these weak assumptions, because the market is small and evidence limited.

The premium is not the only cost. A bank that issues a bond normally sets the bonded amount against the firm’s borrowing facility. Banks and insurers both take a counter-indemnity. Either way, a bond protects the employer rather than the firm that takes it out: after paying a claim, the surety recovers the money from the contractor.

How often bonds are used

Rarely, so far. Pye Tait found retention bonds in place of cash on under 0.2% of clients’ contracts and 1% of contractors’ contracts. Clients and main contractors prefer cash, which they can use as working capital, and many treat a claim on a bond as slower than deducting from a payment.

The same research found why the government wants a change. 44% of contractors who had retention held in the previous three years had lost some to an insolvency further up the chain. Cash retention sits on the balance sheet of the firm above, and goes with it if that firm fails.

Does the retention ban cover retention bonds?

The ban in the Commercial Payments Bill is aimed at money: a party deducting or keeping back a percentage of what is due, until a condition for release is met. A retention bond involves no deduction. The Bill does not mention bonds, and nothing in it bans them.

Ministers have pointed to bonds as the replacement. At Report in the Lords on 15 September 2026, the government said it favours alternative forms of surety, such as performance, retention and warranty bonds. It will work with surety providers so that alternatives are available when the ban comes into force. It added that money held by a third party as security could itself amount to a retention. Ministers also keep a power to amend the definitions by regulations.

The impact assessment chose the ban over a framework that would have protected cash retention in trust, mainly on cost. Under the ban, employers can ask for a bond or other surety, but nothing requires one. The Commercial Payments Bill and the retention ban sets out the timeline.

What it means for a subcontractor

During the two-year transition, expect bond requests to grow as main contractors look for security that survives the ban. Four checks are worth making before agreeing to one:

• The type. A default bond, or the JCT form with its named heads of claim, rather than a pure on-demand bond.
• The maximum sum and the reduction. It should match the retention it replaces and fall by half at practical completion.
• The expiry date. Set against the end of the defects period, with nothing open-ended.
• The facility. What the bond takes out of the firm’s borrowing capacity, for how long, across every job carrying one.

Bond wording varies, and the JCT and NEC forms are amended on many projects. This article follows the JCT Retention Bond 2016 and NEC4 Option X16 as published, and the Commercial Payments Bill as passed by the House of Lords on 20 October 2026. It is general guidance rather than legal advice.