Retention Money in Construction: Cost and Early Release

Retention money is the slice of every running account bill that a client keeps back as security until the contractor has finished the work and fixed its defects. On an Indian EPC or construction contract it is earned revenue that can sit outside the business for years, and once the project team has moved on, it is often the receivable nobody chases.

This guide is general information, not legal, tax or accounting advice: your contract and your advisers decide what applies to you.

What is retention money in construction?

Retention money in construction is a percentage deducted from each certified bill and held by the client as security for the contractor's performance, released after completion and the defect liability period. The contractor has earned it; the client simply has not paid it yet.

It builds up bill by bill. Each running account bill (RA bill) is valued at contract rates, and the retention percentage comes off the gross amount before payment, alongside any mobilisation advance being recovered. The plain-language definition of retention money in the Crestline glossary walks through one bill line by line.

Retention money is not a penalty or a discount. It is a receivable whose release condition is usually a certificate rather than a date.

How much retention is normally deducted?

The retention rate is whatever the contract says, and contracts commonly set it at 5 to 10 per cent of each bill. On Indian government works the same mechanism usually appears under the name security deposit.

A contract's own Schedule F can set a different figure, and the West Bengal relief was time-bound, so read your contract before using any number above.

When is retention money released?

Retention money is released when the contract's release condition is met: typically completion, then the end of the defect liability period, and in government work often only once the final bill is passed. Under CPWD conditions, the whole security deposit stays with the client until the later of those events.

CPWD GCC 2019, in its security deposit refund clause, says the security deposit "shall not be refunded before the expiry of twelve months (six months in the case of work costing Rs. Ten lakhs and below except road work) after the issue of the certificate final or otherwise, of completion of work, or till the final bill has been prepared and passed whichever is later" (source). Road works can get half back after six months if the Engineer-in-Charge agrees.

Many private and EPC contracts split the release instead: half at practical completion, the rest at the end of the defect liability period. Neither pattern is universal, which is why the release trigger has to be recorded per contract.

CPWD GCC 2019 also says the deducted security deposit "can be released against bank guarantee issued by a scheduled bank, on its accumulations to a minimum of Rs. 5 lac". The cash comes back early; the contractor pays bank charges and uses guarantee limit instead.

How much cash does retention lock up?

Retention locks up the retention percentage of the contract value by the end of the build, and keeps it locked through the defect liability period and however long the release then takes. The cost is that balance multiplied by your cost of funds for the time it is held.

Illustrative example (round numbers, not drawn from any client or benchmark):

• Contract value: ₹100 crore, built over 24 months, billed evenly.
• Retention: 5%, all held until 12 months after completion (CPWD-style).
• Cost of funds: 10% a year, simple interest, as a stated assumption.

On those assumptions, retention costs ₹1.25 crore of interest on a ₹100 crore job, a fifth of it from six months nobody chased the release. If, for illustration only, a bank charged 1.5% a year for a guarantee covering the ₹5 crore through the defect liability period, the charge would be ₹5 Cr × 1.5% × 1 = ₹0.075 crore against ₹0.50 crore of interest. Ask your bank for your real rate.

Retention also belongs in your working capital position, even where the balance sheet parks it elsewhere.

Is retention the same as security deposit?

Not always. In Indian government contracts, the "security deposit" deducted from running bills works like retention money; in other usage, a security deposit is a lump sum paid up front, and a performance bank guarantee is a third instrument again.

The names are used loosely across clients, so the definitions in your own contract govern.

How is retention money accounted for in India?

Under Ind AS 115, retention money is usually recognised as part of revenue at full value and not discounted, because the delay exists to give the client security rather than financing. RSM India notes this was "an important change from Ind AS 18", under which an ICAI Expert Advisory Committee opinion had required discounting (RSM India).

On GST, a TaxGuru analysis states that "the amount of progress billing, including retention money, has to be accounted for GST based on the date of invoice", so tax can fall due on retention years before the cash arrives (TaxGuru). Confirm with your tax adviser.

The practical consequence: retention sits in receivables with no due date in most finance systems, so it never appears as overdue. It also inflates days sales outstanding without anyone owning it.

How do you track retention across projects?

Track retention as its own receivable per contract, aged from the release trigger (the completion certificate and the end of the defect liability period) rather than from the invoice date, with a named owner after the site team disbands.

A workable register holds, per contract: rate and cap, cumulative amount deducted (reconciled to RA bills), release trigger and date, whether bank guarantee substitution is allowed, the documents the client needs, and the owner.

Where Crestline fits

Crestline is process intelligence software for EPC and construction finance teams. Crestline reads event logs read-only from the systems a contractor already runs (SAP, Oracle, Tally, Zoho, project accounting systems or spreadsheets), follows each RA bill as its own case, and ages retention from the completion certificate rather than from the invoice, carrying it as its own line with an owner. Crestline then tracks each finding until the cash moves. The process mining approach Crestline uses explains how those cases are rebuilt from the logs.

What Crestline does not do: Crestline is not an ERP or accounting software, does not write back to your systems, does not issue or arrange bank guarantees, and does not give legal or tax advice.

To see your own retention position aged from completion, book a Crestline demo.

Key takeaways

• Retention money is earned revenue held by the client, commonly 5 to 10% of each bill, released only when a contractual condition is met.
• Under CPWD GCC 2019 the security deposit is 2.5% of each running and final bill, held until 12 months after completion or until the final bill is passed, whichever is later.
• In the illustrative ₹100 crore example, retention costs ₹1.25 crore at a 10% cost of funds, a fifth of it from a six-month late release.
• Age retention from the release trigger, not the invoice, and give it an owner after handover.

FAQ

Is GST payable on retention money before it is received?

GST on retention money is generally treated as due on the full invoice value, including the retained amount, at the time of invoice, according to a TaxGuru analysis. That means a contractor can pay tax on retention years before the client releases it. Confirm with a tax adviser for your contracts.

How long is the defect liability period on CPWD works?

Under CPWD General Conditions of Contract 2019, the security deposit is not refunded before twelve months after completion (six months for works of ₹10 lakh and below, except road work), or until the final bill is passed, whichever is later. Individual contracts can set their own terms, so check the contract.

Can a contractor get retention money back before the defect liability period ends?

A contractor can often get retention money back early by giving a bank guarantee in its place, if the contract permits. CPWD GCC 2019 allows the deducted security deposit to be released against a scheduled bank's guarantee once it accumulates to at least ₹5 lakh. The contractor then pays bank charges instead of carrying locked cash.

Sources

• https://www.cpwd.gov.in/Publication/GCC_Construction_2019.pdf
• https://www.niperhyd.ac.in/Tenders/CPWD_GCC.pdf
• https://wbxpress.com/performance-security-reduced/
• https://www.rsm.global/india/sites/default/files/media/RSM%20India/Publications/2018/ind_as_115_revenue_from_contracts_with_customers_overview_and_impact_on.pdf
• https://taxguru.in/goods-and-service-tax/retention-withheld-amount-gst.html
• https://www.crestlineintelligence.com/llms-full.txt