In every construction payment round, a small percentage is withheld instead of being paid to the contractor. That withheld sum — retention money — is the security tool ensuring the contractor returns to fix defects during the warranty period, and also the sum most persistently disputed after the works end. This article analyses customary rates, release timing, the employer’s right to set off repair costs, and the limitation period when the contractor sues to recover it.
Deduction rates and the link to statutory warranty money
Retention is built up by deducting a percentage from each quantity payment until the total withheld reaches an agreed cap on the contract value. For state-funded works, Decree 207/2026/ND-CP sets minimum warranty money of 3% for special-grade and grade I works and 5% for other grades, and deduction through payments is the usual way that warranty fund is formed. Private projects agree rates freely; market practice commonly totals 5% of the contract value, deducted evenly or more steeply in early rounds. Retention should be distinguished from a bank warranty guarantee: many contracts let the contractor substitute the withheld cash with a guarantee to free its cash flow.
The core negotiation point is not the rate but the release milestones. Domestic and international practice commonly releases half of the retention at handover acceptance and the balance when the warranty period ends with confirmation that warranty duties are fulfilled. A contract that specifies deduction but no clear release milestone and conditions turns the sum into an indefinitely suspended amount — and the cause of most retention recovery lawsuits.
Setting off repair costs: notice and evidence are mandatory
The employer may spend retention on remedying defects where the contractor fails its warranty duty after due process: written notice of the defect, a reasonable period for the contractor to repair itself, and only upon non-repair or inadequate repair may the employer engage a third party and set off the actual cost against retention. Deducted costs must be reasonable remediation costs supported by invoices; punitive deductions, or deductions for defects outside the contractor’s responsibility, count as groundless withholding.
The notice sequence protects both sides. Contractors should require the contract to state that every deduction comes with an itemised cost statement and documents within a set period, plus a right to object to disputed deductions without delaying release of the undisputed part. Employers should photograph the defect state and invite the contractor to witness it before a third party repairs, because missing original-state evidence is the most common reason deductions are rejected in arbitration.
Recovery disputes and the limitation period
Where the warranty period has ended and the employer still has not released the retention, the contractor may demand payment with late-payment interest as agreed in the contract or under commercial late-payment rules, and sue under the dispute clause. The limitation period for commercial dispute claims is 02 years from the time legitimate rights and interests are infringed, under Article 319 of the Commercial Law, counted from when the retention fell due for release and was not paid. Contractors must watch this date because the commercial limitation is shorter than the ordinary civil one and is the first defence respondents raise.
In practice most retention disputes settle before suit when the parties can reconcile three documents: the deduction ledger by payment round, the handover acceptance and warranty-completion confirmation, and the statement of amounts already set off with their documents. An employer keeping transparent deduction records almost never loses this kind of dispute; an employer deducting without documents must repay with interest even where the defect was real.
Frequently Asked Questions
What is a customary retention percentage?
Market practice commonly totals about 5% of the contract value, deducted as a percentage of each payment until the cap is reached. For state-funded works, Decree 207/2026/ND-CP sets minimum warranty money of 3% for special-grade and grade I works and 5% for other grades. Many contracts allow the contractor to replace cash retention with a warranty guarantee to free cash flow.
When is retention released: at acceptance or after the warranty period?
Under the customary structure, one part — usually half — is released at handover acceptance, and the balance after the warranty period ends with confirmation that the contractor fulfilled its warranty duties. Release milestones and conditions must be written into the contract; a contract silent on release is the main reason retention gets suspended and sued over.
Must the employer give notice before spending retention on repairs?
Yes. The employer must notify the defect in writing and give the contractor a reasonable period to repair first; only on non-repair or inadequate repair may it engage a third party and set off documented actual costs against retention. Deductions without notice or without cost documents can be treated as groundless withholding and must be repaid.
What is the limitation period for a contractor suing to recover retention?
Two years for commercial disputes under Article 319 of the Commercial Law, counted from when the retention fell due for release under the contract and the employer failed to pay. The contractor should demand payment in writing as soon as it is overdue to fix the infringement date, and may also claim late-payment interest as agreed or under commercial late-payment rules.
Practical recommendations
The retention clause should be short but complete on four elements: the deduction rate, the cap, the two release milestones with their conditions, and a set-off procedure with notice and documents. Employers should administer the sum like an escrow with its own ledger from the first payment round; with a clear ledger, retention does its security job without turning into a disputed debt years after the plant is already running.
This article has been quality-reviewed by the FLAW AI Legal Council