Retention Money in Construction Projects: Legal Rights & Risks in Bahrain
Retention money is a widely used financial safeguard in construction contracts across Bahrain. It plays a crucial role in ensuring project quality and contractor accountability, but it can also become a source of legal conflict if misunderstood or misused. When not managed properly, retention clauses can delay payments, strain business relationships, and lead to costly disputes.
In this blog, we explain how retention money works in Bahrain, your legal rights and risks as a client or contractor, and how to protect your interests through effective legal drafting and dispute resolution.
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What Is Retention Money?
Retention money is a percentage of the contract value commonly between (5% to 10%) withheld by the project owner from each interim payment made to the contractor. This withheld amount serves as financial security to ensure that the contractor completes the work according to the contract and addresses any defects during the Defects Liability Period (DLP).
Typically, half of the retention is released upon the issuance of the Taking Over Certificate (TOC), which marks the official handover of the project. The remaining half is released after the DLP expires, provided that all defects have been rectified to the client’s satisfaction.
Legal Framework in Bahrain
Retention money is legally recognized under Bahraini civil and commercial laws and is commonly included in construction and engineering contracts, especially those based on FIDIC standards. However, because there is no specific legislation that governs retention, its enforceability relies heavily on clear and precise contract terms.
Disputes commonly arise when clients delay or refuse to release retention funds, when the contractor fails to correct defects, or when the retention clause itself lacks clarity. In such cases, the legal strength of each party’s position depends on how well the contract was drafted and how thoroughly project documentation has been maintained.
Common Legal Issues
Retention money can lead to serious disagreements, especially when expectations are not clearly defined. One of the most common issues is when a project owner unjustifiably withholds retention funds even after the contractor has completed the work and the DLP has ended. In some cases, disputes also arise when no Taking Over Certificate is issued, making it difficult to determine when the retention should be released.
Another recurring issue is when the client uses the retention as leverage in unrelated contract disputes. This can severely disrupt cash flow for contractors and delay the closeout of projects.
Example:
Consider a typical case in which a contractor completes a multi-unit commercial project. After handover, and following the end of the Defects Liability Period, the contractor formally requests the release of the remaining retention amount. The developer delays the payment, citing minor maintenance issues that had not been previously documented.
The contractor consults a lawyer to assess whether the developer’s position is legally justified. Upon reviewing the contract, it is clear that the DLP has expired and no formal defect notice had been issued within the allowed period. The legal advisor confirms that there are no grounds to continue withholding the money.
This example highlights how clarity in contract language, proper documentation of handover dates, and timely responses during the DLP can make or break a legal claim regarding retention money.
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Legal Risks for Project Owners and Developers
Clients who misuse or withhold retention funds without legal justification may find themselves in breach of contract. This can expose them to damage claims, interest penalties, or even formal litigation. Retaining money beyond the agreed timeline without documented defects may also damage their reputation and relationships with contractors, especially in public tenders or recurring projects.
Legal Risks for Contractors
For contractors, the risks are mostly financial. Retention money can tie up large amounts of capital for extended periods, disrupting cash flow and delaying reinvestment into future projects. If the contractor fails to track the status of TOCs or DLP expiry, they may also lose the opportunity to enforce timely payment. Additionally, vague or poorly negotiated retention clauses can weaken their ability to recover withheld funds.
Best Practices for Project Owners
To reduce the risk of disputes, clients and developers should ensure that all construction contracts include a clear and enforceable retention clause. The clause should define the percentage withheld, the conditions for release, and the consequences of non-compliance. It’s also essential to document all defects during the DLP and issue formal notices to contractors in a timely manner.
Best Practices for Contractors
Contractors should monitor retention balances on all projects and maintain records of TOC dates and DLP expiry. Any request for release should be made in writing, backed by evidence of defect resolution or a clean inspection report. If the client delays payment, contractors should seek legal advice immediately to assess their options and assert their contractual rights.
How Legal Support Helps
Legal support plays a key role in both preventing and resolving disputes related to retention money. A qualified construction lawyer can draft or review retention clauses before the contract is signed, advise on best practices for compliance, and help you enforce or defend your position in case of a dispute. Legal intervention often leads to faster resolutions through formal demand letters, mediation, or court proceedings when necessary.