Retention Bonds
What is a Retention Bond?
A retention bond is a financial instrument commonly used in the UK construction industry as an alternative to traditional cash retentions. Typically, clients withhold a percentage (often 3% or 5%) of interim payments to contractors to ensure the completion of work and address any defects. This practice can strain cash flow, especially when profit margins are narrow.
With a retention bond, instead of withholding cash, the client receives a guarantee from a surety provider. This bond guarantees that funds will be available to rectify any issues if the contractor fails to meet contractual obligations. Consequently, contractors benefit from improved cash flow, while clients maintain financial security.
The cost of obtaining a retention bond varies, typically ranging from 0.4% to 5% of the bond value. Factors influencing this cost include the contractor’s financial stability and the project’s risk profile. Contractors often bear this expense, considering the cash flow advantages it offers.
Incorporating retention bonds can lead to more efficient project execution by alleviating financial pressures on contractors and ensuring clients have the necessary safeguards against potential defects or incomplete work.
What is a Bond?
Placing your first bond? Or just need a refresher? Read on for the what’s what of surety bonds.
Surety protects a business from financial losses, usually caused when one party fails to fulfil their end of a contract. By placing a surety (usually in the form of a bond), a business makes sure that all the project bills will be paid on time should there be any disruptions or problems fulfilling the contract.
Principal
The Principal is the business placing the bond. They are making a promise to the Obligee. To them, the Surety bond is like insurance.
Surety
The Surety promises to pay the Obligee should the Principal not do as they promise.
Obligee
The Obligee is the party that requests the bond from the Principal.
When might a Retention Bond be required?
A contractor wants to improve cash flow
Instead of having a percentage of payments withheld (often 5%), the contractor provides a bond, allowing them to receive full payment while still giving the client financial protection.
The client requires protection against defects or incomplete work
Clients use retentions to ensure any defects identified during the defect liability period are rectified. A retention bond offers the same security without holding back cash.
The contractor is worried about the solvency of the client or they are worried that the client won’t release the final retention at defects.
Obtaining a Certificate of Making Good can be difficult, with a retention bond in place, cash retentions can’t be held hostage or used as a discount.
It’s contractually agreed as an alternative to cash retentions
Many main contractors and clients now include the option for a retention bond in their contracts, especially on large-scale or longer-term projects where cash flow is critical.
The contractor is working on multiple projects
Using retention bonds instead of cash retentions helps maintain liquidity and working capital across several jobs at once.
In short, retention bonds are used when both parties agree that protecting project quality doesn’t need to come at the expense of a contractor’s cash flow.
Can PS Surety help?
PS Surety is a dedicated surety bond brokerage and we would be delighted to assist any contractor with placing performance bonds. We are fully regulated by the FCA and we guarantee that we provide our clients with:
The best possible terms available in the market
An honest, open and joint approach to our client’s Surety needs
Detailed client dashboard providing information on every bond ever placed
Communication when bonds become overdue
A single touch point within our organisation for wording reviews, quotes and queries
Rapid responses
That sounds expensive!
Our service is completely free to contractors. We are paid a commission by the surety providers on each bond that we place with them on behalf of our clients, the details of which are fully disclosed in our client dashboard.
The surety providers are happy to pay our commission because we specialise in bringing them business which fits their ever changing underwriting criteria. We also deal with frequent queries, wording issues, bond drafting and general administration.
The price that you pay PS Surety for a bond is the same price that you would pay any Surety if going direct.
Frequently Asked Questions – Retention Bonds
What is a Retention Bond?
A Retention Bond is a type of surety bond used to replace cash retentions that are held by a client during the construction or development process. It guarantees that the contractor will complete the work to the required standard and rectifies any defects that may arise within a set period after project completion, without requiring the client to hold back a portion of the contractor’s payment.
Why are Retention Bonds required?
Retention Bonds are commonly used in the construction industry as an alternative to cash retention. They are required when:
- A client wants assurance that the contractor will rectify any defects or complete outstanding work without holding back part of the contract value
- A contractor wishes to avoid having funds withheld from them during the project
Who benefits from a Retention Bond?
The client (also known as the obligee) benefits from the Retention Bond. It ensures that if the contractor fails to rectify defects or complete the project to the required standard, the client will have access to compensation from the bond to cover the costs.
What is the typical bond amount?
The typical bond amount is equivalent to the retention sum that would have been withheld from the contractor’s payments. This is generally around 5% to 10% of the contract value, though it can vary depending on the agreement between the parties.
How long does a Retention Bond last?
Retention Bonds typically remain in force until the maintenance or defects liability period has passed. This can range from 12 to 24 months, depending on the terms of the contract.
How is a Retention Bond different from a Cash Retention?
A Retention Bond is a more efficient alternative to cash retention because it frees up the contractor’s working capital while still providing security to the client. Instead of withholding a percentage of the contractor’s payments, the client receives the security of the bond without tying up cash.
What are the advantages of using a Retention Bond?
- For Contractors: The bond provides access to the full contract value without holding back cash, improving liquidity and cash flow.
- For Clients: The bond offers the same security as cash retention, ensuring that work is completed to the required standards and defects are rectified, without the need to hold back large sums of money.
How do I apply for a Retention Bond?
To apply for a Retention Bond, contact PSS. We’ll guide you through the process, liaise with your client, and arrange the best terms from our network of A-rated sureties to ensure that your bond is issued quickly and efficiently.
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