Retention Sums in Malaysia: When Must They Be Released?

Retention money is usually released when the conditions stated in the construction contract have been satisfied. In many contracts, the first half is released upon practical completion and the second half after the defects liability period or the issuance of a Certificate of Making Good Defects.

However, contractors should not assume that retention money is being safely held in a separate account for them. Unless the contract and the parties' conduct establish a trust, Malaysian law generally treats unpaid retention as a debt owed by the employer or main contractor.

That distinction becomes particularly important if the party holding the retention becomes insolvent.

What is retention money?

Retention is a percentage deducted from progress payments and held back as security for the contractor's proper completion of the works and rectification of defects.

For example, a contract may allow 10% to be deducted from each interim payment until the total retention reaches 5% of the contract sum.

The exact percentage, maximum amount and release conditions depend on the contract.

There is no single rule requiring every construction contract to release retention at the same point. The starting point is always the retention clause.

When is retention normally released?

Many Malaysian construction contracts divide retention into two parts, often called the first and second moieties.

The first half is commonly released when practical completion is achieved and the Certificate of Practical Completion, or CPC, is issued.

The second half is commonly released after the defects liability period has expired and the relevant certificate confirming that defects have been made good is issued.

The precise wording still matters.

For example, under certain PAM forms, the second half of the retention may only become payable after the Certificate of Making Good Defects has been issued and the contractual period for honouring the certificate has expired.

In WTK Engineering Sdn Bhd v Seriemas Development Sdn Bhd [2021] MLRHU 2420, the High Court examined the contractual conditions governing the second moiety of retention and held that the relevant certificate had not yet been issued, meaning the contractual payment condition had not been satisfied at that stage.

The lesson is that contractors should identify the actual release trigger rather than assuming that the mere expiry of time automatically makes every retention sum immediately payable.

What if the employer refuses to issue the certificate?

The position becomes more complicated where the contractor has completed the work but the required certificate is never issued.

An employer or main contractor should not be allowed to rely indefinitely on a missing certificate where its own failure is the reason the certificate does not exist.

In Elite Alliance Engineering Sdn Bhd v Visi Nusajaya Sdn Bhd [2021] MLRHU 1603, the contractor had completed the works and there was an approved joint measurement sheet, but the relevant completion certificate was not issued.

The High Court treated the approved measurement evidence as sufficient proof of completion and held that the employer could not rely on its own failure to issue the certificate to defeat the retention claim.

A similar practical approach appeared in Federal Furniture Industries Sdn Bhd v Ireka Engineering & Construction Sdn Bhd [2022] MLRHU 1177, where the defects liability period had long expired and the court allowed the claim for the second retention sum despite the absence of the expected certificate.

These cases do not mean certificates can always be ignored. They show that the court will look at why the certificate was not issued and whether the contractor had in fact completed its obligations.

Can the employer keep retention because the main contractor has not been paid?

This depends on the wording, but a conventional pay-when-paid arrangement may be void under section 35 of the Construction Industry Payment and Adjudication Act 2012.

A clause which says that retention will only be released after the party holding it receives the corresponding retention from somebody further up the contractual chain may amount to a prohibited conditional payment provision.

That issue arose in Elite Alliance, where part of the payment mechanism depended on release of funds by the employer to the main contractor.

The practical point is that a contractor should distinguish between a genuine release condition, such as completion or certification, and a condition that simply transfers the risk of someone else's non-payment.

Is retention money held on trust for the contractor?

Not automatically.

This is one of the most important points in Malaysian retention law.

In SK M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd & Another Appeal [2019] 2 MLRA 511, the Federal Court held that retention money under a construction contract is not automatically held on trust for the contractor.

Whether a trust exists depends on the wording of the contract and the intention shown by the parties.

In that case, the retention money had not been segregated into a separate account. The Federal Court held that the contractors did not have a beneficial ownership claim over a separate retention fund.

The result was significant because the party holding the retention had become insolvent. The subcontractors were left as ordinary unsecured creditors rather than being able to claim that the retention money belonged beneficially to them.

For contractors, this means retention should not be viewed as money sitting untouched in a separate account unless the contractual arrangements genuinely require that.

Why does this matter if the employer becomes insolvent?

Suppose a main contractor is holding RM300,000 of your retention and then goes into liquidation.

If the retention is merely a contractual debt, you may have to prove for the RM300,000 alongside the main contractor's other unsecured creditors.

You may recover only a portion of what is owed, depending on the company's available assets.

If the contract genuinely creates a trust and the funds have been properly identified and segregated, the legal position may be different.

For contractors negotiating substantial projects, it may therefore be worth considering whether the contract should require retention money to be kept separately rather than simply remaining part of the payer's general funds.

How do you demand the release of retention?

The first step is to identify the exact contractual trigger.

Check whether the CPC has been issued, whether the defects liability period has expired, whether outstanding defects have been rectified and whether the CMGD or equivalent certificate has been issued.

Then calculate the amount due and the date on which payment should have been made under the contract.

If the certificate has not been issued, ask why. Where you have completed the relevant works, make a written request for the certificate and provide the documents supporting completion.

If payment remains outstanding after the contractual due date, send a formal demand identifying the retention clause, the release event, the amount due and the payment deadline. Where the delay looks like an unrelated deduction rather than a genuine release condition, it is worth checking whether it is really a disguised set-off or backcharge.

The strength of the demand will usually depend on being able to show clearly that the contractual release conditions have already been satisfied.

Can retention be claimed through CIPAA?

Potentially, yes.

An unpaid retention sum arising under a written construction contract may form part of a CIPAA payment dispute if the relevant payment entitlement has arisen.

The payment claim must still comply with section 5 CIPAA by identifying the amount claimed, due date, contractual basis and relevant work or services.

A contractor should not assume that CIPAA automatically accelerates a retention sum that is not yet contractually payable. The release conditions still need to be examined.

Where the successful party in an adjudication remains unpaid, section 30 CIPAA may in some circumstances allow direct payment from the principal higher up the contractual chain.

The latest position on retention and direct payment

Retention has also become important in recent cases involving section 30 CIPAA.

In Kinu Sdn Bhd v Kerajaan Malaysia (Jabatan Kerja Raya Malaysia) [2025] MLJ 162, the Court of Appeal considered whether retention held by the principal could be taken into account for the purpose of a subcontractor's direct payment application under section 30.

The Court of Appeal adopted a practical approach to the statutory protection given to successful subcontractors and held that retention held by the principal could be relevant to determining whether money was available for direct payment, depending on the evidence concerning amounts due between the principal and main contractor.

This area should still be approached carefully because a section 30 direct payment application is different from an ordinary contractual claim for release of retention, which may instead belong in arbitration or court proceedings. The existence of retention does not automatically mean that every subcontractor can demand it directly from the principal.

What evidence should a contractor keep?

A retention claim is easier to enforce where the contractor can produce the relevant contract, payment certificates, CPC, defect lists, rectification records, correspondence requesting certification, CMGD or equivalent certificate, final account documents and proof of the retention amount deducted from earlier payments.

If the relevant certificate has not been issued, evidence showing that completion occurred and that there are no outstanding defects becomes particularly important.

The contractor should also keep correspondence showing any attempt by the employer or main contractor to postpone release because somebody else has not paid.

Frequently Asked Questions

When is the first half of retention usually released?

Commonly upon practical completion and issuance of the CPC, but the actual contract must be checked.

When is the second half usually released?

Usually after the defects liability period and the making good of defects, often upon issuance of a CMGD or equivalent certificate.

Can the employer keep my retention because it has not been paid?

Not necessarily. If the clause makes your payment conditional on payment from a third party, section 35 CIPAA may render that condition void where CIPAA applies.

Is my retention money protected if the employer becomes insolvent?

Not automatically. The Federal Court has held that retention money is not automatically held on trust. Without the necessary contractual intention and identification of the fund, the contractor may simply be an unsecured creditor.

Final takeaway

Retention should be treated as a contractual payment entitlement, not as money that automatically belongs to the contractor from the moment it is deducted.

The contract determines when the first and second portions become payable. Where the release conditions have been met, the employer should not be able to postpone payment indefinitely by refusing to issue a certificate without proper justification.

Contractors should also understand the insolvency risk. Unless the arrangements create a genuine trust, retention may simply be an unsecured debt if the party holding it becomes insolvent.

The safest approach is to identify the release trigger early, keep evidence that the conditions have been satisfied and demand payment promptly once the retention becomes due.

Speak to JPP LAW

Justin, Poh & Partners, also known as JPP LAW, assists employers, main contractors, subcontractors and consultants with retention claims, construction payment disputes, CIPAA adjudication, direct payment applications and construction litigation in Malaysia.

If retention has not been released despite completion of the relevant works or expiry of the defects liability period, you may contact us to assess the contractual release conditions and available recovery options.

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Disclaimer: This article is for general information only and does not constitute legal advice. Retention claims depend heavily on the wording of the construction contract, certification requirements, defects liability provisions, payment dates and the financial position of the party holding the retention.