Retention Money in UAE Construction Contracts: Understanding When Contractors Can Demand Release of Payment

Retention money is a standard feature of construction contracts across the UAE. It provides employers with financial security by allowing them to withhold a percentage of each interim payment until the contractor completes the works and rectifies any defects that arise after completion. Although this arrangement is commercially accepted, disputes frequently arise when employers continue to withhold retention long after the contractor has fulfilled its contractual obligations.

 

Federal Decree-Law No. 25 of 2025 Promulgating the Civil Transactions Law, which came into force on June 1, 2026, replaced the previous Civil Code under Federal Law No. 5 of 1985 concerning the Civil Transactions Law of the United Arab Emirates. The new law does not apply retrospectively. Contracts entered into before June 1, 2026 continue to be governed by the 1985 Civil Code, while those concluded on or after that date are governed by the 2025 Civil Code. The applicable Civil Code therefore depends on the date the contract was executed.

 

What Is Retention Money?

 

Retention money is a percentage of the contract price that an employer deducts from each certified payment during the course of a project. Rather than representing payment the contractor has not yet earned, retention consists of money that has already been earned but whose payment is deferred until specified contractual conditions have been satisfied.

 

The purpose of retention is to protect the employer against defective workmanship, incomplete works, or the contractor's failure to rectify defects after completion. It is intended to provide temporary security rather than a permanent reduction in the contract price.

 

When Does Retention Become Payable?

 

The timing of retention payments depends primarily on the terms of the construction contract. Many UAE projects adopt FIDIC-based contracts, under which retention is commonly released in two stages.

 

The first portion is generally released once practical completion has been achieved and the relevant Completion Certificate or Taking-Over Certificate has been issued. The remaining balance is usually released after the defects liability period has expired, provided the contractor has remedied all properly notified defects and complied with its post-completion obligations.

 

Regardless of which Civil Code applies, construction contracts must be performed in good faith. Once the contractual conditions for the release of retention have been satisfied, an employer should not delay payment without a valid contractual basis.

 

Practical Completion and the Right to Retention

 

Practical completion is usually the first significant milestone affecting a contractor's entitlement to retention money. Although the precise definition varies between contracts, it generally means that the works have been substantially completed and are capable of being used for their intended purpose, even if minor defects or snagging items remain outstanding.

 

Disputes often arise when employers refuse to certify practical completion despite occupying or using the completed project. Whether such a refusal is justified depends on the terms of the contract and the actual condition of the works. Minor snagging items alone will not normally justify indefinitely delaying certification where the project is otherwise substantially complete.

 

The Effect of the Defects Liability Period

The defects liability period gives the employer an opportunity to identify defects that become apparent after practical completion and to require the contractor to rectify them. It is not intended to provide a mechanism for delaying payment indefinitely.

 

Once the contractor has remedied all defects properly notified in accordance with the contract, the remaining retention should ordinarily be released through the contractual certification process, which may require the issue of a Performance Certificate or Defects Certificate.

 

The statutory decennial liability regime under UAE law operates independently of the contractual retention mechanism and does not, by itself, justify withholding retention beyond the agreed contractual release period.

 

Can Employers Continue Withholding Retention Because of Alleged Defects?

 

One of the most common disputes in UAE construction projects arises when an employer refuses to release retention money on the basis of alleged defects. While employers are entitled to protect their interests, they cannot withhold retention indefinitely without a valid contractual basis.

 

An employer may be justified in retaining part or all of the retention where genuine defects exist, the contractor has been notified in accordance with the contract, and the contractor has failed to carry out the necessary remedial works within the agreed timeframe. In such circumstances, retention continues to serve its intended purpose as security for the contractor's outstanding obligations.

 

However, employers must exercise their contractual rights in good faith. They should not rely on vague or unsupported allegations to delay payment once the contractor has complied with its obligations. Retention is intended to secure performance, not to provide continuing commercial leverage.

 

Where an employer has taken possession of, and is using, the completed works without identifying defects in accordance with the contract, continued withholding of retention is unlikely to be justified.

 

Recovering Unpaid Retention

 

Before pursuing legal action, contractors should ensure they have complied with the contractual requirements for completion and maintain comprehensive project records to support their claim. Completion certificates, inspection reports, correspondence, photographs and other project records demonstrating compliance with the contract are often critical evidence in retention disputes.

 

Where payment remains outstanding, contractors should issue a formal written demand identifying the contractual provisions governing retention and explaining why payment has become due. The demand should also address any defects raised by the employer and request payment within the timeframe specified in the contract.

 

If the dispute cannot be resolved amicably, the contractor may pursue its claim through the dispute resolution procedure set out in the contract, whether before the UAE courts or by arbitration. Where an employer continues to withhold retention without contractual justification, this may amount to a breach of contract, entitling the contractor to recover the retained sums together with any other remedies available under the contract or applicable law.

 

Protecting Contractor Retention Rights

 

Contractors should also comply with all contractual notice and certification requirements, as failure to do so may weaken an otherwise valid claim.

 

This has become even more significant under the 2025 Civil Code, which introduced a new notice requirement within the provisions governing muqawala contracts. Contractors must notify the employer immediately when circumstances arise that may hinder performance, and failure to do so may render them liable for the resulting consequences. Contractors working under contracts governed by the new law should therefore ensure strict compliance with this requirement to preserve their contractual rights.

 

Seeking legal advice at an early stage can also help prevent disputes from escalating. Prompt action when certification is delayed or retention is withheld without proper justification often leads to a quicker and more cost-effective resolution.

 

Conclusion

 

Retention money plays an important role in UAE construction contracts by protecting employers against defective or incomplete performance. At the same time, it is not intended to become a permanent deduction from the contractor's entitlement or a mechanism for delaying payment indefinitely.

 

Whether a contract is governed by the 1985 Civil Code or Federal Decree-Law No. 25 of 2025, the underlying principle remains the same: contracts must be performed in accordance with their terms and in good faith. Once practical completion has been achieved, the contractor has fulfilled its obligations during the defects liability period, and the contractual conditions for release have been been satisfied, the employer should release the retained sums.

 

Where employers continue to withhold retention without a legitimate contractual basis, contractors have legal remedies available. By maintaining accurate project records, complying with contractual procedures, and acting promptly when disputes arise, contractors can significantly strengthen their position when pursuing a claim for unpaid retention in the UAE.