• Written by: admin
• October 31, 2026

Retention money in construction contracts often decides whether a project ends in profit or loss. Employers deduct it from every running bill, yet contractors frequently chase it for years after handover. This guide explains when the money falls due, what the government rules say, and how contractors can recover it.

What Is Retention Money in Construction Contracts?

Retention is money the contractor has already earned. However, the employer keeps a slice of each bill as security until the contractor fixes defects. Indian public contracts often call it a “security deposit”. In contrast, a milestone payment does not fall due until the contractor achieves the stage itself.

Most EPC and item-rate contracts link release to two events. First, the engineer issues a completion certificate. Second, the defect liability period (DLP) expires without unresolved defects. Some contracts also let the contractor swap retention for a bank guarantee midway through the project.

How Much Retention Can Government Employers Deduct?

Rule 171 of the General Financial Rules, 2017 governs performance security in Central Government contracts. On 29 December 2023, the Department of Expenditure amended this rule. For works contracts, the OM keeps performance security plus security deposit or retention money within 3% to 10% of contract value.

Earlier, a Department of Expenditure OM dated 12 November 2020 cut performance security to 3% for existing contracts during the pandemic. That relief, however, excluded contracts already under dispute. Contractors should therefore check which rate their tender actually adopted.

Key Case Law on Retention Money

• Aashish Mohan Gupta v. Hind Inn and Hotels Ltd. (NCLAT, 12 February 2020): NCLAT held that 5% retention money forms part of the main bill. It therefore qualifies as an operational debt, and the tribunal upheld admission of a Section 9 IBC petition.
• Drilltech Engineers v. Shapoorji Pallonji (NCLT Mumbai, reported July 2022): The tribunal rejected a claim that included retention money because the petition came too late. It also held that an acknowledgement after limitation expires cannot revive the debt.
• Union of India v. Manraj Enterprises (Supreme Court, 18 November 2021): The Court held that an arbitrator must respect a contract clause that bars interest. Many government contracts expressly deny interest on security deposits.
• Union of India v. R.K. Constructions (Madras High Court): The court upheld interest on a refunded security deposit. The employer had never pleaded the interest bar or placed the contract conditions before the arbitrator.

Step-by-Step: How to Recover Withheld Retention Money

1. Map the trigger. Read the release clause and note the completion date and the DLP end date.
2. Collect records. Keep the completion certificate, joint inspection notes and proof that you fixed every snag.
3. Demand release in writing. Send a formal letter as soon as the DLP ends, and request any defects list in writing.
4. Offer a bank guarantee. If the employer cites pending defects, offer a guarantee for the disputed portion.
5. Watch limitation. Count three years from the date payment falls due. Secure written acknowledgements before that period lapses.
6. Use the dispute clause. Invoke the dispute board, conciliation or arbitration. Alternatively, file a commercial suit or a Section 9 IBC application where the facts allow.
7. Plead interest carefully. Check for an interest bar first. Conversely, employers should plead that bar early.

Our infrastructure and construction law practice handles such claims for contractors, PSUs and lenders.

FAQs on Retention Money in Construction Contracts

What is retention money in a construction contract?

It is a percentage of each running bill that the employer holds as security. The employer must release it once the contractor meets the contractual conditions.

When should the employer release retention money?

Usually, the employer releases it after the defect liability period ends, or earlier against a bank guarantee. The contract clause controls the exact trigger.

How much retention can a government employer deduct?

For Central Government works, the December 2023 GFR amendment caps performance security and retention together at 3% to 10% of contract value. Each tender still fixes its own figure within that range.

Can a contractor claim interest on retention money?

Yes, unless the contract bars it. After Manraj Enterprises, arbitrators must honour an express bar on interest on security deposits.

Is unpaid retention money an operational debt under the IBC?

Yes. NCLAT held in Aashish Mohan Gupta that retention forms part of the main bill. Contractors can therefore use Section 9 when no genuine pre-existing dispute exists.

What is the limitation period to recover retention money?

Generally, it is three years from the date the money falls due, often the end of the DLP. A written acknowledgement within that period extends it.

Lex Pleaders advises contractors, employers, banks and NBFCs on retention money, performance security and final bill disputes in EPC, PPP and BOT projects. Write to us at lexpleadersindia@gmail.com to discuss your matter.

Disclaimer: This article offers general information only and does not constitute legal advice.