Summary: Milestone payments and retention money serve distinct purposes in construction contracts—one drives progress, the other secures performance. Milestone payments become due only upon achieving defined stages, while retention is money already earned but withheld until final completion or defect rectification. Misconstruing these concepts can lead to costly disputes, making precise drafting and clear nomenclature critical for risk management and claim success.
In construction and EPC contracts, the two payment mechanisms that routinely appear side‑by‑side—milestone payments and retention money—are sometimes (mis)treated as equivalents. They are not. Milestone payments are entitlements that arise only on completing a defined stage; retention is money already earned but withheld as security until completion/defects clearance. Mistaking one for the other can invert risk allocation, derail cash‑flow, and—crucially—make or break claims worth crores.
Why the Difference Matters
Authoritative texts draw the line crisply. Hudson explains that stage/milestone payments are stipulated sums payable only on completion of defined stages, and there is no room for substantial performance arguments to claim a stage payment earlier.[1] Chandana Jayalath similarly notes that, under milestone mechanisms, payment is triggered by the event (the stage), not by general progress valuation.[2]
Conversely, Keating[3] and Halsbury[4] describe retention as a portion of the contract price withheld as security—a fund available to complete or rectify defects—and typically payable only upon final completion and certification. Markanda[5] (India) echoes this, noting that “security deposit” is the Indian analogue and acts as a fund to be drawn upon, should the occasion either arise to complete the work or to rectify defects upon failure of the contractor to do so.
Position in England on Milestone Payments
English courts approach milestone payments as entire obligations tied to reaching explicit stages. In Bennett (Construction) Ltd v CIMC MBS Ltd [2019] EWCA Civ 1515, the Court of Appeal upheld a contract that replaced interim valuation with five milestone payments. The court held that the trigger for payment depends on the contract, and where completion/certification of a stage is a condition precedent, no payment falls due until that event occurs. Similarly, Timberbrook Ltd v Grant Leisure Group Ltd [2021] EWHC 1905 (TCC) reinforced that each stage is an entire obligation, and no accrued right to that stage’s payment exists until the specified progress has been achieved.
Position in India on Milestone Payments
Indian decisions likewise treat milestone stages as hard triggers. In Videocon Telecommunications Ltd v IBM India Pvt Ltd, 2018 SCC OnLine Del 11606, the court upheld an arbitral award that refused milestone-linked invoices because those specific milestones were not achieved. Similarly, the Kerala High Court in M/s P & C Projects Pvt Ltd v State of Kerala (2021) refused relief where the contract expressly permitted withholding where a milestone was missed.
Foundational principles also surface frequently in EPC disputes: Tribunals cannot rewrite contracts or grant equitable reliefs dehors the bargain—relevant where contractors seek “deemed” achievement of tests [e.g., Provisional Acceptance Test (“PAT”)/Final Acceptance Test (“FAT”)/ Performance Guarantee Test (“PGT”)] to unlock milestone sums. Principles such as quantum meruit may also not apply in case of milestone payments. A claim in quantum meruit cannot arise if an existing contract between the parties stipulates paying an agreed sum at a particular stage.[6]
Position in England on Retention Money
Retention, conceptually and doctrinally, is different. The progress payments are made as work proceeds, but retention is held until completion. In Relicpride Building Company Ltd v Cordara & another [2013] EWCA Civ 158, the court addressed contractual clauses governing retention sums and their release upon completion of specified events. Similarly, in Dr. Jones Yeovil Ltd v The Stepping Stone Group Ltd [2013] EWHC 2308 (TCC), the court considered withholding of retention percentages until defects were rectified and certificates issued. These cases underscore that retention money is treated as security and its release is contingent on fulfilling contractual conditions including rectification of defects. The retention money acts as security and can be set off against pending defects / claims.
Position in India on Retention Money
Indian doctrine and practice use “security deposit” largely interchangeably with retention money. Markanda summarises the Indian position: Employers deduct an agreed percentage (historically 10 per cent, now commonly 5 per cent) as security; retention represents the balance unpaid on interim valuations and is generally released on completion, or post-defects liability if the contract so stipulates. The Delhi High Court’s judgment in Italian Thai Development Public Company Ltd v MCM Services Ltd (2020) offers pointed guidance: Retention had been deducted from running bills for the work actually done. The arbitral tribunal directed refund of retention when the contractor’s counter-party had withdrawn its counterclaims, leaving no subsisting claims against which the retention could be set off.
Putting It All Together
Milestone payments and retention money are different legal animals serving different policy goals:
- Milestones: cash-flow instruments that only become payable when defined stages are achieved; no substantial performance claims or quasi-valuation will substitute for the agreed trigger.
- Retention: a security mechanism—money already earned, withheld to incentivise performance and fund defect rectification if required; release is usually tied to final completion/defects certificates.
Drafting implications:
- Define milestones and evidence of achievement with precision.
- Ring-fence retention as security—state percentages, split-release, certification conditions, and set-off mechanics.
- Avoid cross-pollinating terminology—labels track consequences.
Conclusion
Retention money will become payable to the contractor when the contractual conditions for release are met (typically final completion and/or defects clearance/certification). The employer may, however, set off quantified defects costs/losses from retention—consistent with its nature as security. Indian authority confirms that, absent subsisting crossclaims or a contractual basis to continue withholding, retention must be released.
Milestone payments will not become payable until the specified milestone is achieved (often evidenced by certificates or completion of testing). Courts in England and India consistently hold that partial or “substantial” performance does not suffice, and tribunals cannot “deem” milestone completion to circumvent explicit conditions.
The practical implications are stark: A contractor claiming retention money may succeed even if some minor defects remain, subject to set-off for rectification costs. However, a contractor claiming a milestone payment without having achieved the milestone will fail entirely—the payment simply does not become due.
Bottom line: In construction contracts, especially EPC frameworks where the final 10per cent often rides on PAT/FAT/PGT, nomenclature and drafting precision are decisive. Treating retention as security and milestones as stage-entitlements aligns your contract with the jurisprudence and can prevent costly surprises. In real-world disputes, that line often decides claims worth crores of rupees.
“Milestone payments incentivise progress; retention money ensures quality and compliance.”
For further information, please contact:
Kapil Arora, Partner, Cyril Amarchand Mangaldas
kapil.arora@cyrilshroff.com
[1] Hudson’s Building and Engineering Contracts, 11th edition, Volume 1, London Sweet and Maxwell, at Page no. 488
[2] ‘Contractual Dimensions in Construction: A Commentary in a Nutshell’, authored by Mr. Chandana Jayalath (iUniverse, 2011, ISBN[2] 1450274498, 9781450274494)
[3] Keating on Construction Contracts, Sweet & Maxwell [Chapter 4, Page 4-5]
[4] Halsbury’s Law of England, Building Contracts Vol. 6 2018
[5] Markanda’s Building and Engineering Contracts 4th edn., Vol. 1
[6] Keating on Construction Contracts, 10th Edition “Keating” at [4-031]
