Retention and Performance Bonds in Kenyan Construction Contracts

Retention money and performance bonds are the two main tools a client in a Kenyan construction contract uses to protect against a contractor’s poor or incomplete work. Retention is a percentage of each interim payment that the employer holds back rather than paying out immediately, while a performance bond is a guarantee, usually from a bank or insurer, that pays out if the contractor fails to complete the works. Both mechanisms are creatures of the building contract itself rather than of a single statute, which is why disputes over them often turn on the precise wording the parties used, read alongside the National Construction Authority’s regulatory framework for the construction industry. This article explains how retention and performance bonds typically work under Kenyan construction contracts, what regulation applies, and where disputes commonly arise.

How Retention Money Works

Under Kenya’s standard building contract, the Agreement and Conditions of Contract for Building Works published by the Joint Building Council, the employer is entitled to retain a percentage of the value of work, materials and goods certified in each interim payment, with the percentage stated in the contract’s appendix. That retained sum is released in two stages. Half is certified for payment once the architect issues a certificate of practical completion, and the contractor is entitled to be paid that instalment within fourteen days of presenting the certificate. The balance is released only once the defects liability period named in the contract has expired and the architect has certified that outstanding defects have been made good. This structure gives the employer leverage to require the contractor to return and fix defects during the defects liability period, since the final tranche of retention is the contractor’s incentive to do so.

Because the retention percentage and the defects liability period are set in the contract’s appendix rather than fixed by law, they vary from project to project. A common dispute is an employer who does not release the final retention once the defects liability period ends, often because new defects have appeared or the employer disputes whether earlier defects were properly remedied. The contractor’s remedy is to press for the architect’s final certificate and, if that is refused unreasonably, to pursue the claim as a breach of the contract’s payment terms.

How Performance Bonds Work

A performance bond is a separate instrument from retention. Under the standard building contract, the contractor must, before starting work, provide security, typically a bank or insurance guarantee, in a sum equivalent to a percentage of the contract price, commonly ten percent, to cover due performance of the contract up to practical completion. If the contractor defaults, for example by abandoning the site or failing to complete within the contract period, the employer can call on the bond up to its face value to cover the additional cost of completing the works with another contractor.

Because a performance bond is usually an “on demand” instrument, the issuing bank or insurer will typically pay out on the employer’s written demand without first investigating whether the contractor was actually in default. This makes performance bonds powerful and sometimes contentious. A contractor who believes a bond has been called on unfairly, for instance where the alleged default is disputed or the employer is itself in breach, generally cannot stop the bank paying the employer, and must pursue the employer afterwards for return of the money or damages under the underlying contract.

The Role of the National Construction Authority

The National Construction Authority Act, 2011 does not itself prescribe retention percentages or bond values; its role is to regulate who may carry out construction work at all. Under section 15, a person may not carry on the business of a contractor unless registered by the Authority, and under section 5 the Authority accredits and registers contractors and regulates their professional undertakings. A contractor engaged without the required NCA registration exposes the arrangement to challenge on that basis, quite apart from any dispute over retention or bonds.

Where the National Construction Authority framework does bear directly on retention is through the National Construction Authority (Defects Liability) Regulations, 2020, which apply to commercial buildings. Regulation 3 sets a minimum patent defects liability period of twelve months from practical completion, and regulation 5 sets a minimum latent defects liability period of six years from the end of the patent defects period. Regulation 6 requires the contractor and any subcontractor to take out latent defects insurance, and requires the architect, engineer and other relevant professionals to hold professional indemnity cover for latent defects. These minimums matter to retention practice because a contract’s defects liability period, and therefore when final retention falls due, cannot lawfully be set below the regulatory minimum for a commercial building, even if the appendix specifies a shorter period.

Performance Security on Public Sector Projects

Where the employer is a public body, the Public Procurement and Asset Disposal Act, 2015 and its 2020 Regulations add a further layer. Regulation 45 of the Public Procurement and Asset Disposal Regulations defines performance security as security provided by a supplier to protect the procuring entity against non-performance, and it prescribes the acceptable forms, including cash, a bank guarantee, an insurance company guarantee, or a guarantee from another approved financial institution. The specific percentage and validity period required for a given public works contract are set out in that contract’s own tender documents rather than fixed generally by the Regulations, so a contractor bidding for public works needs to check the specific tender’s requirements rather than assume a standard figure applies.

Parliament has also had before it a Construction Payments Adjudication Bill, not yet enacted at the time of writing, proposing a statutory right to fast adjudication of payment disputes, including retention disputes, independent of whether the underlying contract provides for adjudication. Contractors and employers should watch its progress, since it would change how retention and payment disputes are resolved if it becomes law.