Guarantees & surety
Retention Bond
Replaces cash retention held by the employer with an insurance bond, releasing working capital to the contractor while leaving the employer’s position intact.
Boland’s Quay, Dublin · William Murphy, CC BY-SA 2.0
Who it is for
Contractors carrying retentions across multiple live contracts
What it does
- Releases 3–5% of contract value back into working capital
- Runs to the end of the defects liability period
- Can be issued mid-contract to release retention already held
- Priced on the contractor, not on the employer’s covenant
The product in full
Retention is the oldest cash-flow problem in construction. An employer holds back 3% to 5% of every payment as security for defects, releases half at practical completion and the rest at the end of the defects liability period — often two years later. Across a live order book, that is a permanent, unremunerated loan from the contractor to its employers, and it is money the contractor has already spent on wages and materials.
A retention bond replaces the cash. The employer accepts a bond from an insurer instead of holding the money, and the contractor gets its retention paid in the ordinary payment cycle. The employer’s position is unchanged: it can still call on the bond for defects. The contractor’s position changes considerably, because the working capital comes back into the business.
The arithmetic is usually decisive. A contractor with £4m of turnover carrying 5% retention has £200,000 tied up. The bond premium on that exposure is a small fraction of the cost of financing the same sum on an overdraft, and it does not use the overdraft.
Literature
Product literature is issued to appointed intermediaries. Ask your underwriter, or request it through the enquiry form.
- Retention bond wordingOn request
- Contract schedule templateOn request
How it works
What happens, in order
From the first enquiry to the point the cover, the contract or the facility is in place.
The contract allows a bond in lieu of retention
Most standard forms do. Where the contract is silent, the employer’s agreement is needed first — we can supply wording for that conversation.
We price on the contractor, not the employer
The risk is that the contractor fails to remedy a defect, so the underwriting looks at the contractor’s balance sheet and its record, not at the employer’s covenant.
The bond issues and the retention is released
It can be issued at the start of a contract, or mid-contract to release retention already held. The employer releases the cash against the bond.
It runs to the end of the defects liability period
Then it expires, on the employer’s certificate. Any defect notified in the meantime is dealt with under the wording before release.
The numbers
A worked example
Illustrative arithmetic, so the shape of the product is visible rather than described. Nothing here is a quotation or a projection.
Releasing £200,000 of retention on a £4m contract
A fit-out contractor has £4m of work with a single corporate employer holding 5% retention — £200,000. A retention bond is issued mid-contract, running 24 months to the end of the defects liability period, on our standard conditional wording.
The contractor is in band 2, with a director counter-indemnity.
- Bond value
- £200,000
- Term
- 24 months
- Indicative premium rate
- 0.90% p.a.
- Premium for the term
- £3,600
- Issuance and arrangement fee
- £250
- Total indicative cost
- £3,850
- Cost as a share of bond value
- 1.93% of bond value
How the rate is built
- Base rate — Retention Bond0.95% p.a.
- Financial strength — Band 2 — strong and consistently profitable−5%
- Security — Parent or director counter-indemnity−10%
- Wording — Conditional — default must be establishedNo adjustment
- Beneficiary — Corporate employer in Ireland, the UK or the EEA+5%
- Term — 13 – 36 months+5%
Compare the total against the cost of financing £200,000 for two years, or against what the business earns on its own working capital. That comparison, not the rate, is what a retention bond is bought on.
Where the £4m contract sum sits
Certified payments against retention held — and it is the small slice that the bond converts back into working capital.
Contract sum
£4,000,000
- Certified and paid£3,800,000 · 95%95% of the contract sum, paid in the ordinary cycle
- Retention held as cash£200,000 · 5%5%, released half at practical completion and half up to two years later
View these figures as a table
| Amount | Share | |
|---|---|---|
| Certified and paid — 95% of the contract sum, paid in the ordinary cycle | £3,800,000 | 95.0% |
| Retention held as cash — 5%, released half at practical completion and half up to two years later | £200,000 | 5.0% |
| Contract sum | £4,000,000 | 100% |
Suitability
Where the Retention Bond fits
The cases it answers, the cases it does not, and what an underwriter needs before quoting.
It is the right answer when
- Retention is material against the contractor’s working capital, and the employer will accept a bond.
- Several contracts each hold retention, so the cumulative sum is significant.
- Retention already held can be released mid-contract.
Look at something else when
- The contract prohibits a bond in lieu of retention and the employer will not vary it.
- The defects liability period is unusually long and unindexed, making the bond term uncertain.
What we need to quote
- 1.The contract, and the clause dealing with retention.
- 2.Accounts, management figures and the contracts schedule.
- 3.The value of retention held, or to be held, and the release dates.
Questions
What brokers ask us about this product
Is it cheaper than leaving the cash with the employer?
That depends on what the business does with the money. The comparison to make is the premium against the cost of financing the same sum, or against the return on deploying it in the business.
Can a bond release retention already held?
Yes. Mid-contract issue is routine, and it is the most common reason a contractor asks for one.
Does the employer lose protection?
No. The bond gives the employer recourse for the same defects the retention secured, up to the bond value, for the same period.
Request information
Ask us about the Retention Bond
The form reaches an underwriter in Dublin. If you are an intermediary, say so and we will route it to the broker desk.