What is a retention money guarantee (retention bond)?
A retention money guarantee is a bank guarantee a contractor gives the client in place of cash retention, so the client releases the retained money, or stops deducting it, and holds the bank's promise as security instead.
Also called retention bond, retention bank guarantee, bank guarantee in lieu of retention.
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Retention money guarantee in plain words
Retention money is security the client holds out of every bill. Where the contract allows, the contractor can replace that cash with a guarantee from its bank for the same amount. The contractor gets the cash back now; the bank charges a fee and counts the guarantee against the contractor's banking limit until it is returned. CPWD General Conditions of Contract 2019, for example, allow the security deposit to be released against a scheduled bank's guarantee once it reaches ₹5 lakh.
What is the difference between a retention money guarantee and cash retention?
Cash retention leaves the contractor's money with the client; a retention money guarantee returns that cash and uses the contractor's banking limit instead, at a fee.
| Cash retention | Retention money guarantee | |
|---|---|---|
| Who holds what | The client holds the contractor's cash | The client holds a bank's promise; the contractor keeps the cash |
| Cost to the contractor | The cost of funding the cash held | The bank's fee, plus banking limit in use |
| When it ends | At the release trigger the contract names, often completion and the end of the defect liability period | Returned at the same trigger, which frees the limit |
| Allowed? | Set by the contract | Only where the contract allows the swap |
Release triggers from Crestline's retention money and defect liability period entries; the threshold from CPWD General Conditions of Contract 2019. A contract's own terms override both.
Why does retention money guarantee matter?
A retention money guarantee can return cash that would otherwise sit with the client through the defect liability period, which can be a year or more after completion. The price is a bank fee and banking limit that cannot be used for anything else while the guarantee is open.
Where does retention money guarantee mislead?
Whether the swap is allowed, the minimum amount, the banks the client accepts and the wording of the guarantee all come from the contract. A guarantee left open after its release trigger keeps using banking limit for nothing, so it has to be returned and cancelled. Check your contract and take advice before relying on this entry.
What do people get wrong about retention money guarantee?
- Comparing the fee with nothing
- The fee only looks expensive against free money. Compare it with what holding the same cash costs at your own cost of funds for the same period.
- Not getting the guarantee back
- When the release trigger arrives, the guarantee has to be returned and cancelled with the bank. Until then it still counts against the banking limit.