Construction guarantees
Retention Guarantee
Most building contracts hold back a retention, a slice of every payment, as security that the works are finished properly and defects are put right. A retention guarantee is an insurance-backed guarantee that can replace that withheld cash, where the employer agrees to it under the contract. All applications are subject to underwriting.
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Replaces cash retention
Runs through the defects liability period
Employer must agree under the contract
FSP 49912 authorised broker
What it is
Your money working, not sitting
Most building contracts withhold a retention, a percentage of each payment to the contractor, as security for proper completion of the project and defect correction. A retention guarantee, also called a retention bond, is an insurance-backed guarantee that can replace the need to withhold that cash where the employer agrees under the contract. It is intended to make funds available, up to the guaranteed amount and on the terms of the guarantee, to fix defects or incomplete work if the contractor fails to do so, protecting the employer without tying up the contractors money.
The employer is what contracts call your client: the party that awarded you the work, not your own boss. The guarantee protects the employer, not you. It responds up to the guaranteed amount, on the terms of the wording, and replacing cash retention needs the employer’s agreement.
CivilSure arranges retention guarantees for contractors across the civil and construction industry, from owner-run businesses to large national companies. Guarantees are issued by the guarantor, an insurer, not by CivilSure.
The short version
What it covers
Defects, after completion
The retention guarantee covers the contractor’s obligations to remedy defects or outstanding works after completion. It responds up to the guaranteed amount stated in it, on its terms, and only for the obligations it names. It is not cover for your own losses.
Putting defects right
If the contractor fails to return and fix defects identified during the defects liability period, the employer can call on the bond to finance the repairs.
A pool of funds
It serves the same function as retention: money available to correct defects discovered after completion if the contractor does not rectify them.
Two ways it is used
Often provided at the start so that, where the employer agrees, retention is not withheld from each payment certificate. Sometimes provided later, at practical completion, and swapped for the accumulated cash retention where the contract and the employer allow it to be released earlier.
Final completion
The bond stays in force through the defects liability or maintenance period. Once that period ends and final completion is certified, the guarantee expires on the terms set out in its wording.
The trade-off
Who benefits, and what it costs you
Worth being clear-eyed about, because it runs both ways.
The employer
Keeps financial security for defect repairs. The insurer stands in for the retained money, up to the guaranteed amount and on the terms of the guarantee, so the employer keeps security if the contractor defaults on remedial works.
You
Where the employer accepts a guarantee in place of cash retention, you are not left with a sum withheld from each payment. That money stays in the business and on the project rather than locked away.
The catch
If the bond is called because of defects, you remain liable to reimburse the insurer, so the incentive to fix the defects does not go away.
The trade-off is straightforward. The employer keeps security for defect repairs, you keep working capital, and in return you provide collateral, pay a premium, and remain liable to reimburse the insurer if the guarantee is called.
Claims
What could trigger a call
These are common situations in which an employer may call on a retention guarantee. Whether a demand is valid depends on the wording of the guarantee issued.
Defects not corrected in time
Where the contractor does not correct defects within the period agreed in the contract, the employer can call on the guarantee to fund the remedial work.
Refusal or delay
Even if defects are minor, if the contractor refuses or delays repairs beyond the contract timeframe, the employer can demand payment under the bond.
Not returning to site
Where the contractor does not return to site when requested to fix defective workmanship or materials, the employer can call on the guarantee.
Liquidation
If the contractor is liquidated during the defects liability period and defect obligations remain outstanding, the employer may call on the guarantee, subject to its wording, to fund the remedial work.
If it is called, the money moves first. The guarantor pays the employer on a valid demand, then recovers from you under your indemnity, against the securities on your facility. The guarantee protects the employer, not you: it is not cover for your own losses and it does not remove your liability.
Quick answers
Retention Guarantee questions
The ones contractors ask us most often.
What happens if I fail to correct the defects?
If you default or fail to honour your obligations, the employer may call on the retention guarantee to correct the defects. The insurer responds up to the guaranteed amount, on the terms of the guarantee, so the employer can fund the outstanding remedial work. The insurer will then hold you liable under your indemnity and expect reimbursement of the amount paid.
Is a retention guarantee the same as a performance guarantee?
No. A performance guarantee secures completion of the works themselves. A retention guarantee secures the defect obligations that survive completion, and stands in place of the retention money the contract would otherwise hold back. Both can run on the same contract at different stages. See Performance Guarantee.
Can an employer call it unfairly?
Many retention guarantees are on-demand instruments, and whether yours is depends on the wording the employer requires. On-demand means the employer can demand payment if they claim you failed to fix defects. Insurers will investigate, but on an on-demand guarantee the demand generally triggers payment before the underlying dispute is resolved. That is why the wording deserves attention at tender or appointment stage.
Do all contracts require them?
No. Whether retention is held at all, and whether a guarantee may replace it, is set by the contract and by the employer. Send us the contract and we will tell you what it asks for.
What does it cost?
Two main amounts, and they work differently. The premium is the price of the guarantee and is not refundable. Collateral is security held by the guarantor rather than a fee: it stays your money and is refundable once the guarantee has expired or been returned and anything owed has been settled, under the terms of your facility agreement. If a guarantee is called, the guarantor recovers against the securities on your facility. Both amounts are set on underwriting and shown on your facility quotation before you commit, along with any other charges that apply. Whether collateral earns interest, and on what basis, is set out in that agreement.
What do I need to apply?
- Company profile, two years of financials, three months of bank statements
- Company registration, letterhead, directors’ IDs and tax numbers
- Tax clearance and CIDB certificates
- The contract information and the wording the employer requires
It is gathered once when the facility is opened, and a guarantee request after that draws on what is already held. The full list, and what the guarantor assesses, are on Guarantees Explained.
This page is a plain language summary. What applies to you is set out in your facility agreement and the wording of the guarantee issued. If anything here is unclear, ask us before you sign.
Free up the cash the contract is holding.
Send us the contract and we will check whether a retention guarantee suits it, what the employer would need to agree to, and what it would cost once underwriting is complete. No obligation either way.