In construction and EPC contracts, milestone payments and retention money frequently appear together and are often assumed to operate in the same way. That assumption is incorrect. Milestone payments and retention serve different commercial and legal purposes. A milestone payment becomes payable only when a specified stage is completed. Retention, by contrast, is part of the contract price that has already been earned but is withheld as security until completion or clearance of defects. Treating the two as interchangeable can distort risk allocation, disrupt cash flows, and critically undermine high-value claims.

Why the Distinction Is Important

Leading construction law texts draw a clear boundary between these mechanisms. Hudson explains that stage or milestone payments are fixed sums payable strictly upon completion of defined stages, and that there is no scope to rely on substantial performance to claim payment before the stage is achieved.[1] Chandana Jayalath similarly observes that milestone-based payment structures are event-driven, with payment triggered by the achievement of the milestone itself rather than by an assessment of overall progress.[2]

Retention operates on a different footing. Keating[3] and Halsbury[4] describe retention as a portion of the contract price withheld as security, intended to ensure completion of works and rectification of defects. It represents a fund that may be drawn upon if the contractor fails to complete or remedy defects, and is ordinarily released only upon completion and certification. Markanda[5], writing in the Indian context, equates retention with “security deposit” and explains that it functions as a reserve available to the employer to complete the works or rectify defects in the event of contractor default.

English Law on Milestone Payments

English courts consistently treat milestone payments as entire obligations linked to specific contractual stages. In Bennett (Construction) Ltd v CIMC MBS Ltd [2019] EWCA Civ 1515, the Court of Appeal upheld a contractual structure that replaced interim valuations with five milestone payments. The court held that where completion or certification of a stage is a condition precedent, no payment becomes due until that condition is satisfied.

This approach was reaffirmed in Timberbrook Ltd v Grant Leisure Group Ltd [2021] EWHC 1905 (TCC), where the court confirmed that each milestone constitutes a self-contained obligation. Until the relevant stage is completed, the contractor acquires no accrued right to the corresponding payment.

Indian Law on Milestone Payments

Indian courts have adopted a similar approach. In Videocon Telecommunications Ltd v IBM India Pvt Ltd, 2018 SCC OnLine Del 11606, the Delhi High Court upheld an arbitral award rejecting milestone-linked invoices on the ground that the specified milestones had not been achieved. The Kerala High Court, in M/s P & C Projects Pvt Ltd v State of Kerala (2021), likewise refused relief where the contract expressly permitted withholding payment upon failure to meet milestones.

These decisions reflect a broader principle frequently applied in EPC disputes: tribunals cannot rewrite contracts or grant equitable relief contrary to the agreed bargain. This becomes particularly relevant where contractors seek to argue “deemed” completion of tests such as the Provisional Acceptance Test (PAT), Final Acceptance Test (FAT), or Performance Guarantee Test (PGT) to unlock milestone payments. Doctrines such as quantum meruit also offer no assistance in this context. Where a contract specifies payment of an agreed sum upon completion of a particular stage, a claim in quantum meruit does not arise.[6]

English Law on Retention Money

Retention is treated differently in principle and practice. While progress payments are made as work advances, retention is withheld until completion and defect rectification. In Relicpride Building Company Ltd v Cordara [2013] EWCA Civ 158, the Court of Appeal examined contractual provisions governing the retention and its release upon completion of defined events. Similarly, in Dr. Jones Yeovil Ltd v The Stepping Stone Group Ltd [2013] EWHC 2308 (TCC), the court considered the employer’s right to withhold retention until defects were remedied and the requisite certificates issued.

These decisions emphasise that retention money operates as security. Its release is contingent upon fulfilment of contractual conditions, and the retained sums may be applied towards outstanding defects or claims.

Indian Law on Retention Money

In India, retention money is commonly referred to as a “security deposit” and is treated in much the same way. As Markanda explains, employers typically deduct a specified percentage—traditionally 10 per cent, now more commonly 5 per cent—from running bills as security. Retention represents the unpaid balance of work already executed and is usually released upon completion or after the defects liability period, depending on the contract terms.

The Delhi High Court’s decision in Italian Thai Development Public Company Ltd v MCM Services Ltd (2020) provides useful clarity. In that case, retention had been deducted from running bills for work actually performed. The arbitral tribunal directed release of the retention once the employer withdrew its counterclaims, leaving no subsisting claims against which the retention could be set off.

Synthesising the Principles

Milestone payments and retention money perform distinct legal and commercial functions:

Milestone payments operate as cash-flow mechanisms and become payable only upon completion of defined stages. Neither substantial performance nor notional valuation can substitute for the agreed trigger.
Retention money functions as security. It represents money already earned but withheld to ensure completion and defect rectification, and is generally released upon satisfaction of contractual conditions, subject to set-off.

Drafting consequences follow directly from this distinction:

Milestones and the evidence required to establish their achievement must be defined with precision.
Retention should be clearly characterised as security, with express provisions on percentage, staged release, certification requirements, and set-off rights.
Terminology should not be mixed, as labels determine legal consequences.

Final Observations

Retention money becomes payable once the contractual conditions for its release are met, typically upon final completion and/or defect clearance. Employers may deduct quantified costs for rectifying defects from retention, consistent with its character as security. Indian authority confirms that where there are no subsisting counterclaims or contractual grounds for continued withholding, retention must be released.

Milestone payments, however, do not accrue until the specified milestone is achieved. Courts in both England and India have repeatedly held that partial or “substantial” performance is insufficient, and tribunals cannot deem milestone completion in order to bypass express contractual conditions.

The practical consequences are significant. A contractor seeking release of retention may succeed even where minor defects remain, subject to appropriate set-off. A contractor claiming a milestone payment without having achieved the milestone will fail entirely—the payment never becomes due.

In EPC contracts in particular, where the final 10 per cent is often linked to PAT, FAT, or PGT, careful drafting and accurate nomenclature are decisive. Treating milestones as stage-based entitlements and retention as security aligns contractual risk with settled jurisprudence and can determine the outcome of claims running into crores.

[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]

Milestone Payments and Retention: A Critical Distinction