Defining the bond
A Bond that is issued instead of capital, that a Sub Contractor would be contractually obliged to allow a Main Contractor hold as a retention in most cases up to a year.
A retention bond in many cases goes hand in hand with a Performance bond. The performance bond will cover the contract duration and the retention bond covers the period after the works have been completed (usually anywhere up to 12 months post completion)
Why it’s needed? And what are the implications for sub-contractors?
Releasing capital tied up by contractual obligations. A retention bond will release a considerable amount of capital that otherwise would be held by the Main Contractor for up to a year after the job has finished. If a Sub Contractor does not plan for this period (between practical completion and certification of making good defects) they can find themselves stretched financially. Capital not tied up can obviously go towards future jobs. A Main Contractor will take a retention bond in lieu of this capital. This frees up more working capital for other projects, while still honouring contractual obligations.
Why does the Main Contractor operate this way?
First off this is not meant to be a punitive measure. Your Main Contractor is simply covering themselves, in a lot of cases they have to wait for the expiry of the maintenance period (period after the main contract has been completed) themselves before for their capital will be released by the employer/site owner. So it makes sense to hold back funds due to entities, who have done work for them during the contract period.
Why does the Employer/Site owner operate this way?
These types of bond protect the Employer and gives them peace of mind and security. When releasing the final payment to the Main Contractor they are also covered by a maintenance or warranty period.
How it usually works
For many contracts the Main Contractor will look to cover themselves from risk exposure from their sub contractors. By holding or retaining a % (can be up to 5%) of the contract value, the Main contractor mitigates their risk in this way.
In a lot of cases, part of the retention money can be released by the Main Contractor at Practical completion(this will be defined in your contract with the Main Contractor). Knowing what funds will be released and when is all part of mitigating financial risks.