Retention, Deposits and Staged Payments
Protecting Cashflow on Fixed-Price Jobs

A fixed-price contract protects the client from cost overruns. Without the right payment structure behind it, it can leave the builder funding the job from their own pocket for weeks or months at a time. Deposits, staged payments and retention are the tools that balance this - but they only work if they are set up correctly from the start, written into the contract, and understood by both parties before work begins.

Why Cashflow Is the Real Risk on Fixed-Price Work

Most builders understand that a fixed-price contract carries margin risk - if materials cost more than estimated or the job takes longer, the loss comes out of profit. What is less often discussed is the cashflow risk that exists even on a perfectly priced job.

Consider a kitchen extension priced at PS45,000. Materials are ordered and paid for in weeks one and two. Labour runs through weeks three to eight. If the client pays in one lump sum on completion, the builder has funded the entire job - materials, subcontractors, plant hire - for up to eight weeks. On a job that size, that is easily PS15,000-20,000 of working capital tied up with no income coming in.

Multiply that across two or three concurrent jobs and you have a business that is profitable on paper but constantly short of cash. This is how solvent builders go into administration - not because they priced badly, but because their payment terms allowed clients to use them as an interest-free lender.

Deposits: What Is Reasonable and Why

A deposit is paid before work starts and covers the builder's initial outlay - materials ordered, plant hired, subcontractors booked. It also provides a degree of commitment from the client: a client who has paid a deposit is meaningfully less likely to cancel or delay at the last minute.

What is a reasonable deposit? Industry norms for domestic fixed-price work:

• 10% deposit: standard for larger contracts (PS20,000+) where the client reasonably wants to limit upfront exposure
• 20-25% deposit: appropriate for medium-sized jobs (PS5,000-PS20,000) where materials form a significant proportion of the contract value
• 30-50% deposit: common on smaller jobs (under PS5,000) or where bespoke materials are ordered specifically for the client and cannot be returned

Be wary of clients who refuse any deposit at all. A reasonable client understands that a builder cannot order PS8,000 of materials on credit for a stranger. A refusal to pay any deposit is sometimes a sign of either financial difficulty or an intention to dispute payment at the end.

Do not confuse a deposit with a down payment on profit. The deposit should cover your expected initial outlay, not your entire margin. Asking for 50% upfront on a PS40,000 contract will lose you work unnecessarily and is not standard practice at that scale.

Staged Payments: Tying Payments to Progress

Staged payments - sometimes called milestone payments or interim valuations - are payments made at defined points during the job, tied to completion of specific phases of work. They keep money flowing through the contract rather than building up as a large end payment, and they give the client visible checkpoints where they can assess progress before releasing the next tranche.

A typical stage payment structure for a house extension might look like this:

• Stage 1 - Deposit (10%): due on contract signing, before work starts
• Stage 2 - Foundations complete (20%): due when concrete is poured and inspected
• Stage 3 - Watertight (25%): due when roof is on and building is weathertight
• Stage 4 - First fix complete (20%): due when structural work, first-fix electrics and plumbing are done
• Stage 5 - Practical completion (20%): due when the work is substantially complete
• Stage 6 - Retention release (5%): due at end of defects liability period (typically 6 months)

The stages and percentages should reflect where the actual costs fall. If 40% of your costs are in groundworks and structure, do not set those stages at 20% of the contract value - you will be funding the difference from your own pocket.

How to Define Stage Completion Clearly

Vague stage definitions cause disputes. "Foundations complete" is clear. "Substantial progress on groundworks" is not. Each stage in your contract should describe exactly what work must be done, what standard it must meet, and who confirms completion before payment is triggered.

For stages that require building control inspection (foundations, structural frame, first fix), tie the payment trigger to the passing of that inspection. This gives both parties an objective third-party sign-off rather than relying on the builder's own declaration that a stage is done.

Include a payment timeline in the contract: once a stage is reached and notified to the client, payment is due within a specified number of days (typically 7-14 days for domestic work). Without a timeline, "due on completion of foundations" can mean different things to different people - some clients interpret it as "when I get round to paying it."

Retention: The Right Way to Use It

Retention is a percentage of each payment that the client withholds until the end of a defects liability period - typically 6 or 12 months after practical completion. Its purpose is to give the client funds available to remedy any defects that appear after completion if the builder fails to return and fix them.

Retention is standard practice in commercial construction and on larger domestic contracts. On smaller domestic jobs it is less common and can sometimes be perceived negatively by clients who are unfamiliar with it. How you present it matters:

Standard retention rates for domestic work:

• 2.5-5% on domestic contracts under PS100,000
• 5% is the most common rate, often split: 2.5% released at practical completion, 2.5% at end of defects period
• Defects liability period: typically 6 months for domestic work, 12 months for commercial

Whatever retention rate you agree, make sure the total contract structure still works for your cashflow. A 5% retention on a PS45,000 contract is PS2,250 - significant but manageable. A 10% retention withheld until 12 months after completion is PS4,500 sitting with the client for over a year, which materially affects your working capital.

What Happens When Clients Withhold Payment

Even with a well-structured payment schedule, some clients withhold payments - either because they are dissatisfied with something, because they are in financial difficulty, or because they are simply slow payers. Understanding your legal position helps you respond effectively.

Under the Housing Grants, Construction and Regeneration Act 1996 (as amended), construction contracts above a certain value have statutory payment provisions including the right to suspend work for non-payment. However, this Act does not apply to residential occupier contracts - where a homeowner engages a builder to work on their own home, different rules apply.

For domestic residential work, your key protections are:

• A written contract with clear payment terms, signed by both parties before work starts
• Payment notices issued at each stage, in writing, with a clear due date
• A right to suspend work written into your contract for non-payment beyond a specified number of days
• A lien over materials not yet fixed into the building - materials you have delivered but not yet installed remain your property until paid for, subject to your contract terms

If a client withholds a stage payment without valid reason, issue a formal written notice giving them 7 days to pay before you suspend work. Put this in writing (email is fine) and refer to the clause in the contract. Most payment disputes at domestic level resolve at this point - the client did not realise you had a contractual right to stop, and the prospect of a half-finished extension concentrates the mind.

Using a Standard Form Contract

Writing your own contract from scratch is not necessary and is probably inadvisable - the legal language around payment, disputes and liability is well established and best left to the people who wrote it. Several standard form contracts are suitable for domestic building work:

• JCT Minor Works Building Contract (MW): the industry standard for domestic and small commercial work. Covers payment, variations, disputes and insurance clearly. Available from the JCT website.
• FMB Plain English Contract: the Federation of Master Builders offers a straightforward consumer-facing contract that covers all the essentials without legal complexity.
• HomeOwner Contract: the JCT HomeOwner range is specifically designed for residential clients and is written in plain English rather than legal terminology.

Whichever form you use, read it before presenting it to a client. Know what it says about payment periods, retention, dispute resolution and your right to suspend. A contract you do not understand cannot protect you.

The Conversation Before the Contract

Payment terms are easier to agree before a contract is signed than after a dispute has started. When presenting your quote, include the payment schedule as a headline item - not buried in the small print. Explain each stage, what it represents, and approximately when you expect it to fall due based on your programme.

A client who is uncomfortable with your payment structure at quote stage is giving you important information. Either their expectations are misaligned (fixable with a conversation), or they do not have the funds available to pay at your proposed intervals (a serious concern), or they have had a bad experience with a previous builder and are defensive (understandable, and worth addressing directly).

The goal is a payment structure that both parties understand, that reflects the real cost profile of the job, and that protects both the client's investment and your cashflow. That is not a difficult conversation to have - but it is one that must happen before work starts, not after a payment is missed.