In UAE construction projects, retention money is one of the most important financial safeguards built into the contract. It protects the employer from incomplete work, defects, and nonperformance, while ensuring that the contractor remains committed to fulfilling all obligations through to final completion. Despite its importance, retention often becomes a source of dispute, especially when projects face delays, defects, or disagreements at handover.
Understanding how retention works under UAE law helps both employers and contractors manage expectations and avoid unnecessary conflict.
What Is Retention Money
Retention money is a percentage of the contract value withheld by the employer from interim payments. Its purpose is to ensure that the contractor completes the works properly and rectifies any defects during the Defects Liability Period. Most UAE construction contracts, including those based on FIDIC, set retention at five to ten percent of the contract value.
Retention is usually released in two stages. The first half is released upon taking over or practical completion. The second half is released after the Defects Liability Period expires and all defects have been rectified.
The Legal Purpose of Retention
Retention serves several important functions in construction projects. It ensures the contractor completes the works to the required standard. It provides financial security for the employer in case of defects or incomplete works. It encourages the contractor to return during the Defects Liability Period to fix issues. It reduces the employer’s risk of paying for defective or unfinished work.
Retention is not a penalty. It is a performance guarantee built into the payment structure.
Retention and the Defects Liability Period
Retention is closely linked to the Defects Liability Period. During this period, the contractor must return to the site to fix defects at their own cost. The employer may withhold the second half of the retention until all defects are rectified. If the contractor fails to act, the employer may appoint a third party to carry out the repairs and deduct the cost from the retention.
This mechanism ensures that the contractor remains accountable even after handover.
Common Disputes Involving Retention Money
Retention is one of the most frequently disputed issues in UAE construction projects. Common disputes include delayed release of retention, disagreements over whether defects have been rectified, disputes over the scope of defects, employers using retention to offset unrelated claims, and contractors refusing to return during the Defects Liability Period.
These disputes often arise from unclear contract terms, poor documentation, or breakdowns in communication during project closeout.
When Employers Can Legally Withhold Retention
Employers may withhold retention only in specific circumstances. These include incomplete works at handover, unresolved defects during the Defects Liability Period, or contractual rights allowing setoff for proven claims. Employers cannot withhold retention indefinitely or for reasons unrelated to the contractor’s performance.
Unlawful withholding may expose the employer to claims, interest, or damages.
Contractor Rights Regarding Retention
Contractors have the right to receive retention once they have fulfilled their contractual obligations. They may demand release of the first half upon taking over and the second half after the Defects Liability Period expires. They may challenge unlawful withholding or deductions. They may claim interest or compensation if retention is withheld without justification.
Clear documentation of completed works and defect rectification strengthens the contractor’s position.
Best Practices to Avoid Retention Disputes
Both parties can reduce disputes by adopting practical measures. These include clearly defining retention terms in the contract, maintaining detailed records of works and defects, issuing timely notices during the Defects Liability Period, conducting joint inspections at handover and at the end of the Defects Liability Period, and documenting all communications regarding defects and rectification.
Transparency and documentation are key to avoiding conflict.
Conclusion
Retention money plays a vital role in UAE construction contracts by ensuring performance, protecting employers, and encouraging contractors to complete all obligations through to final handover. However, unclear terms or poor communication can turn retention into a source of dispute. Understanding the legal purpose of retention and the rights of both parties helps ensure a smoother project closeout and reduces the risk of conflict.
Our team at Ayesha Al Dhaheri Advocates and Legal Consultants advises developers, contractors, and consultants on retention disputes, Defects Liability Period obligations, and construction contract enforcement. If you need guidance on retention clauses or are facing a dispute, we provide clear and practical legal support.