Retention Holdback

A retention holdback is an amount withheld under a contract to ensure contract performance and avoid overpayments in relation to progress of work. The Government of Canada Supply Manual uses the shorter form holdback for this concept, and defines it in the CanadaBuys Supply Manual glossary.

In Canadian construction contracting, a holdback is commonly a specified percentage retained from progress payments. It is released after contractual, statutory and completion conditions are met. The percentage and the release conditions come from the contract or from provincial legislation, so suppliers must read each solicitation closely.

How the federal Supply Manual treats holdback

The federal glossary describes holdback as a tool with two purposes: it ensures performance, and it prevents overpayment as work progresses. It does not prescribe a universal percentage or release trigger. Those details must come from the solicitation or the resulting contract, as set out in the Supply Manual glossary.

The CanadaBuys Practitioner's Guide for Procurement Pricing explains that payment associated with a milestone or delivery date may be withheld until the required performance is achieved. It also notes that a holdback may be used as a preventative measure. Federal holdbacks can therefore appear in milestone-based and progress-payment arrangements, not only in construction.

British Columbia's 5% holdback on major works

British Columbia's Major Works General Conditions use the capitalized term Holdback. Under those conditions, the ministry retains 5% of each progress payment approved for payment to the contractor, as stated in the Major Works General Conditions.

The same document lets the ministry, at its discretion, accept substitute security in a form and content satisfactory to it instead of retaining the holdback. It also provides for an interim release, and the remaining holdback is released only after the specified conditions are satisfied.

Alberta letters of credit and release documents

Alberta transportation contracts provide for retention of holdback from progress payments. They also let a contractor provide an irrevocable standby letter of credit in lieu of holdback. Where an acceptable letter of credit is provided, Alberta's specification states that previously retained holdback may be released and that no holdback will be retained from later progress payments.

Release of the retained amount depends on paperwork. Alberta Transportation's release guidance identifies these items, among others:

• a Construction Completion Certificate
• a statutory declaration
• a Workers' Compensation Board clearance letter
• confirmation of environmental compliance
• any required warranties

Ontario's statutory 10% holdback

In Ontario, holdback is a statutory requirement for contracts and subcontracts under which a lien may arise. The Construction Act defines holdback as 10% of the value of services or materials supplied. It requires the payer to retain that amount until applicable liens have expired, been satisfied, discharged or otherwise provided for.

Because the deduction comes from legislation, it is not merely an optional commercial term. Contractors and subcontractors must account for it and for the conditions that govern its release.

What a holdback means for your bid

When you price a Canadian public contract, treat the holdback as part of the payment terms you are accepting. Before you submit, check these points:

• Find the holdback percentage, if any, in the solicitation or draft contract. Examples include 5% in British Columbia major works under the provincial conditions and 10% under Ontario's Construction Act.
• Confirm the milestone, delivery or completion conditions that make the withheld amount payable.
• Check whether substitute security, such as a letter of credit, is permitted in place of a cash holdback.
• List the completion documents the buyer requires for release.