Retention, Set Off and Deduction: Payment Errors That End in Dispute

Deducting money from a construction payment is governed by the contract. These are the deductions that cannot be supported, and what they cost when they are challenged.

Withholding money feels like leverage and is often the opposite. A deduction the contract does not authorise converts a technical disagreement into a payment breach, which can give the contractor rights you did not intend to hand over. The mistakes below are made by owners and main contractors alike, and each has a straightforward alternative.

Why these keep happening

Deductions usually begin as a reasonable instinct: something has gone wrong, the contractor is unresponsive, and the only immediate lever is the next payment. The deduction is made without identifying the clause that permits it, without notice and often without a quantified figure. The contractor then has a clean complaint about non payment that overshadows the original problem, and the conversation moves from the defect to the deduction. The discipline is to separate the two: pursue the problem under the clause that addresses it, and pay what is due.

1. Deducting without identifying the authorising clause

A contract permits specific deductions in specific circumstances, usually with notice requirements. A deduction outside those circumstances is a failure to pay a certified sum, which can trigger interest, a right to suspend or a formal dispute, regardless of how justified the underlying grievance was.

• Avoid it by: Before any deduction, write down the clause, the circumstance, the notice required and the amount. If you cannot complete that sentence, do not deduct.
• Proof it is closed: Every deduction on the certificate has a clause reference and a notice on file.

What it costs you: The original issue becomes secondary to a payment breach you created, with remedies now running against you.

2. Holding retention above the contractual cap

Where the contract caps the total retention, deductions continuing past the cap are simply wrong, and cumulative arithmetic errors across many valuations are common. The error is invisible unless somebody reconciles the retention account separately from the valuation.

• Avoid it by: Maintain a separate retention account showing deductions, the cap, releases and the balance held, reconciled monthly.
• Proof it is closed: The retention account balance can be verified against the contract percentage and cap in two minutes.

What it costs you: An accumulating liability that surfaces as a correction at the final account, with interest arguments attached.

3. Failing to release the step down at practical completion

Most contracts reduce retention at practical completion, because the remaining risk is defects rather than completion. Release frequently fails to happen, either because the certificate is not issued or because nobody triggers the payment. The contractor is then funding security for a risk that has already reduced.

• Avoid it by: Put the retention step down in the completion checklist as a payable action with an owner and a date.
• Proof it is closed: The release appears in the first valuation after practical completion without the contractor asking.

What it costs you: A clear contractual breach on a sum large enough to matter, and a contractor far less willing to return for defects.

4. Deducting the cost of defects before they are quantified

Where a contract allows the cost of remedying a defect to be deducted, it usually requires a procedure: notice to remedy, a period, and then quantification of the actual cost. Deducting an estimate before the contractor has had the opportunity to put the work right skips the procedure and makes the deduction vulnerable.

• Avoid it by: Issue the notice, allow the period, record the failure to remedy, obtain a quotation for the remedial work, then deduct the quantified amount with the evidence attached.
• Proof it is closed: A paper trail showing notice, opportunity, failure and quantification, in that order.

What it costs you: A deduction that has to be repaid, with the defect still outstanding and the relationship damaged.

5. Setting off between unrelated contracts

Where the same contractor holds two contracts with you, deducting on one for a problem on the other is only permissible if the contracts expressly allow cross set off. Without that, the deduction is a non payment under a contract that has no issue, and the contractor remedies apply to that contract.

• Avoid it by: Keep each contract commercially separate unless both contain an express cross set off provision agreed by both parties.
• Proof it is closed: Each valuation and certificate relates only to its own contract.

What it costs you: A dispute on a healthy project caused by a problem on a different one.

6. Withholding against an unsubmitted claim or notice

Deducting money because the contractor has not provided something, such as a programme update, a document or a bond extension, is only available if the contract says so. The administrative frustration is real, and the remedy is usually a different one: withholding an approval, instructing compliance, or using the contract mechanism for the specific failure.

• Avoid it by: Match the remedy to the failure. For a missing bond extension, for example, the contract may expressly permit withholding, and if it does, follow it precisely.
• Proof it is closed: The remedy applied is the one the contract provides for that specific failure.

What it costs you: Loss of the moral high ground on an issue where you were genuinely in the right.

7. Deducting liquidated damages without the required certificate or notice

Liquidated damages normally become deductible only after the contractual preconditions are satisfied, which commonly include a certificate of non completion, a notice of intention to deduct, and the exhaustion or determination of outstanding extension of time applications. Deducting early is one of the most frequently challenged steps in construction administration.

• Avoid it by: Build a preconditions checklist from your contract and complete every item before the first riyal is withheld, with legal advice on the sequence.
• Proof it is closed: A completed checklist with the certificate and the notice dated before the deduction.

What it costs you: Repayment of the deduction with the delay argument still unresolved, and your position weakened for the real dispute.

A short check before you sign

• Every deduction is traceable to a clause, a circumstance and a notice.
• A separate retention account is reconciled monthly against the percentage and the cap.
• The practical completion step down is scheduled as a payable action.
• Defect deductions follow notice, opportunity, failure and quantification in order.
• No set off crosses between contracts unless expressly permitted.
• Liquidated damages preconditions are evidenced before any deduction is made.

If it has already happened

If a deduction has already been challenged, review it honestly against the clause before defending it. Where it cannot be supported, pay it promptly and pursue the underlying issue through the proper mechanism; the cost of that reversal is far lower than the cost of defending an unsupportable position through a dispute process. Where it can be supported but the notice was defective, consider whether the step can be taken again correctly. Rules and remedies in this area differ between contracts and are revised over time, so take advice from a licensed legal adviser on the specific wording before you decide which route to take.

Domira builds and supervises projects across Saudi Arabia, and the commercial discipline above is how its projects stay inside their budget and their programme. Send the drawings, the contract or the site and Domira will tell you where the risk actually sits.