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Surety bonds
A retention bond is a guarantee given in place of a cash retention, so the contractor is paid in full while a surety covers the retention amount. It keeps cash in the contractor's business and away from a payer who might fail.
Part of: Bonds and surety
In short
Under a cash retention, the payer keeps back a percentage of each payment until completion and the end of the defects period. With a retention bond, the payer pays in full and holds a surety or bank guarantee for the retention amount instead. The contractor improves its cash flow and avoids losing retentions if the payer becomes insolvent. In March 2026 the government proposed legislation to prohibit cash retentions in construction contracts, subject to further consultation; as at October 2026 it is not yet law, and retention bonds remain a contractual choice.
Many construction contracts let the payer deduct a percentage from each interim payment as retention, as security for defects. Commonly half is released at practical completion and the rest at the end of the defects or rectification period, but percentages and timings depend on the contract.
For the contractor or subcontractor, retention is money earned but not received, often for a year or more after the work is done. And unless the contract requires retention to be held on trust in a separate account, it is usually just a debt. If the payer becomes insolvent before release, the contractor claims as an unsecured creditor alongside everyone else, as our page on what happens if a customer goes bust explains.
With a retention bond, the payer pays the full amount of each valuation. In return the contractor provides a bond, issued by a surety or bank, under which the guarantor will pay the payer up to the retention amount if the contractor fails to put right defects or otherwise breaches the relevant obligations.
| Cash retention | Retention bond | |
|---|---|---|
| Contractor's cash flow | A percentage of every payment held back | Paid in full |
| If the payer becomes insolvent | Retention usually lost as an unsecured debt | No retention to lose |
| Security for the payer | Cash in hand | A guarantee from a surety or bank |
| Cost to the contractor | Lost use of the money | Bond charge and any security the issuer requires |
| Release | In stages, as the contract says | Bond reduces or expires as the contract and bond say |
The payer must agree. Some standard contract forms include a retention bond option and others do not, so the contract must expressly allow a bond in place of retention, with an agreed bond form, amount and expiry.
The payment rules in Part II of the Housing Grants, Construction and Regeneration Act 1996 apply to retention just as to other payments. Since the 2009 amendments came into force on 1 October 2011 in England and Wales, section 110 says a payment mechanism is not adequate if payment depends on obligations under another contract being performed, subject to limited exceptions for some subcontracts. That limits clauses that tie a subcontractor's retention release to completion of the main contract.
The payer must also follow the payment notice and pay less notice rules in sections 110A and 111 before reducing a sum that has become due. Under section 113, a clause making payment conditional on the payer being paid is ineffective unless a party further up the chain is insolvent. None of this protects retention if the payer itself becomes insolvent.
The government consulted in 2025 on late payment, including two options for retentions: prohibiting them, or keeping them but requiring retained sums to be protected, for example in a segregated account or by an instrument of guarantee such as an insurance or surety bond.
Its Time to Pay Up response, published on 24 March 2026, said the government proposes to take forward a legislative measure to prohibit the deduction and withholding of retention payments under construction contracts. It also said it will:
Under the prohibition option, payers could seek alternative insurance or surety, but it would not be required. As at October 2026 no ban is in force, and existing contracts continue to operate as written. Check the current position before relying on any reform. If a ban arrives, transitional rules will matter for contracts signed before it; the response does not yet settle them.
Illustrative: a mechanical and electrical subcontractor on a £1.2 million package would normally have 3% retention held back, £36,000 by completion. Its client agrees to accept a retention bond for that amount instead. The subcontractor is paid in full each month. Six months after completion the client enters administration. Because no cash was retained, there is no retention to lose; the bond simply runs to its expiry.
Exporters can also get retention bonds supported by UK Export Finance's Bond Support Scheme, which gives the bank a partial guarantee of up to 80% of the bond's value, according to its scheme page.
A retention bond protects the payer against defects; it does not protect you against the payer's failure on the rest of what you are owed. For that, trade credit insurance for subcontractors may help, and our trade credit insurance guide explains the basics.
For other bonds, see performance bonds and maintenance bonds. Fit-out and specialist contractors can read our fit-out contractors' insurance page.
Apex arranges surety bonds and trade credit insurance. A broker reads each enquiry and comes back with options; there is no fee for a quote, and any bond is subject to the insurer's acceptance and the bond terms. To quote we need your business activities, turnover, location and claims history, plus your accounts, the contract and retention terms, the bond wording and your work in hand. Our surety bonds guide and bonds and surety definition give more background, and construction insurance covers the rest of your programme.
It is a guarantee from a surety or bank, given to the employer or main contractor instead of a cash retention. The payer pays each valuation in full, and the bond covers up to the retention amount if the contractor fails to remedy defects or breaches the relevant obligations.
The government proposed it. Its Time to Pay Up response of 24 March 2026 said it intends to legislate to prohibit retentions in construction contracts, after further consultation on implementation and when parliamentary time allows. As at October 2026 no ban is in force.
Only if the contract allows it or the payer agrees. Some standard forms include a retention bond option; others do not. Raise it at tender stage and agree the bond form, amount and expiry in the contract.
Unless it is held on trust in a separate account, retention is usually an unsecured debt, so you claim in the insolvency with other unsecured creditors and may recover little. With a retention bond in place of cash retention, there is no retained sum to lose.
Usually a counter-indemnity from your company, and sometimes from a parent company or directors. Sureties often issue bonds without cash collateral, unlike many banks, but this depends on your financial strength and the bond wording.
Tell us what your business does, your turnover and any claims. A broker reads every enquiry and comes back with options. No fee for a quote. Or call 0117 325 0027.
Start a commercial enquiry Request a callbackApex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information, not advice on your individual circumstances, and it does not guarantee that cover will be available or on what terms.
