How retention, DLP release, PBG and ABG actually work in Indian contracts — and how to track the crores of recoverables most contractors quietly forget.

Ask a contractor what a project earned and you will hear the margin on the final bill. Ask where that margin physically is, and the honest answer is often: locked inside the client's books and the banking system — as retention money, performance guarantees, advance guarantees and security deposits, some of it recoverable years after the last worker left site. A contractor running eight or ten projects can easily have several crores parked this way. This guide explains how each instrument works in Indian contracts, and — the part almost nobody does well — how to track the recoverables so they actually come back.

Retention Money: The Deduction You Pre-Agreed To

Retention (often called security deposit in government contracts) is a percentage deducted from every running bill — typically 5 to 10 percent of each RA bill, accumulating up to a cap, commonly 5 percent of contract value in departmental works. Its purpose is leverage: the client holds part of your earned money as insurance that you will finish the work and fix defects.

The release pattern in most Indian contracts:

First half at completion — released against the completion certificate, sometimes only after the final bill is settled
Second half after the Defect Liability Period — the DLP, typically 12 months from completion for buildings and up to 24 or even 60 months on some infrastructure and waterproofing-heavy works — released after a joint inspection confirms defects are rectified

Two practical points decide whether you see this money on time. First, the completion certificate is a document you must pursue, not an event that happens to you — virtual completion, snag list closure and the certificate itself each have a habit of drifting for months while your 2.5 percent sits idle. Second, most contracts allow you to substitute retention with a bank guarantee, converting dead deductions into a live instrument that costs 1–2 percent a year in commission and margin instead of 100 percent in withheld cash. On thin-margin work, that substitution is often the cheapest working capital you can buy.

The Guarantee Family: PBG, ABG and Their Cousins

A bank guarantee is the bank's unconditional promise to pay the client on demand. The main types on a construction contract:

Performance Bank Guarantee (PBG). Submitted at award, usually 3 to 10 percent of contract value (5 percent is the common departmental figure), valid through completion plus the DLP plus a claim period. It secures overall performance; termination for default means invocation.
Advance Bank Guarantee (ABG), or mobilisation advance guarantee. Clients paying a mobilisation advance of 5 to 10 percent — and sometimes a separate plant advance — take a BG of equal value. The advance is recovered as a percentage deduction from each RA bill, with interest in many government contracts, and the guarantee should be proportionately reduced or replaced as the advance is recovered. Contractors who never claim that reduction pay commission on a guarantee securing money already repaid.
EMD and retention-substitution guarantees. The tender-stage BG, and the guarantee that replaces retention deductions as above.

Every guarantee has the same anatomy: an amount, an expiry date, a claim period beyond expiry, margin money your bank blocks (commonly 10 to 25 percent of the BG value, in FDR or limits), and an annual commission. The banking cost of a ₹50 crore project's guarantee portfolio — PBG, ABG, retention BG — routinely runs to ₹15–25 lakh a year. That cost belongs in your tender pricing, not in the surprise column.

Invocation: The Risk You Manage With Paper

A BG is payable on demand; the bank will not judge the dispute, it will pay. Your protection is procedural: respond to every cure notice in writing, keep the hindrance and correspondence record current, and never let a guarantee's validity lapse mid-contract — an expired PBG is itself a breach that invites termination. On the other side, track claim periods: once expiry plus the claim window passes, insist on the physical return of the original guarantee and the release of your margin money. Banks keep charging commission on guarantees nobody bothered to cancel.

Getting the Instrument Right: Format, Bank and Verification

Guarantees get rejected for form as often as bids do. Departments prescribe the BG format in the tender — use it verbatim, on the correct stamp duty for the state, from a bank the client accepts (some PSU clients maintain approved-bank lists, and many now insist on e-BGs or SFMS confirmation, the bank-to-bank message that lets the beneficiary verify the guarantee is genuine — a sensible demand, given the history of forged BGs in Indian construction). Three drafting points to check before the bank issues: the beneficiary's name and contract reference exactly as the client records them, the validity running the full period the contract demands plus the claim window, and no conditions the format did not ask for — an over-engineered BG is a rejected BG. On the cost side, guarantee commission is negotiable with your bank in a way most contractors never test: a firm with a clean invocation history consolidating its BG business with one or two banks can shave 30 to 50 basis points, which on a multi-crore portfolio is a site engineer's annual salary.

The Recoverables Register: Where the Money Goes to Be Forgotten

Here is the uncomfortable audit most contractors fail: list every project completed in the last five years, and against each — retention balance, release status, DLP end date, guarantees outstanding, margin money blocked, EMDs unreturned. Firms that do this exercise for the first time routinely find ₹1–3 crore of recoverable money with no owner, no follow-up file and no diary date. The reasons are structural:

Retention is deducted bill by bill across years, so no single entry looks big enough to chase
The DLP ends two or three years after the team that knew the project has dispersed
Guarantee expiries live in a drawer, EMD refunds live on a dozen portal logins, and no one report shows the total

The fix is a recoverables register that outlives the project team: per project, per instrument, with amounts, trigger events (completion certificate, DLP end, advance fully recovered) and diary dates that fire regardless of who has resigned. Retention deducted should be visible on every RA bill summary the day the bill is certified — the BOQ & billing module computes it with each bill, so the accumulating balance is a live number, not an year-end reconstruction — and the guarantee and deposit portfolio belongs in financial control with expiry and release alerts, next to the receivables it behaves like.

What This Is Really About: The Cost of Capital

Retention and guarantees are not accounting trivia; they are financing. Five percent retention on a ₹40 crore project is ₹2 crore of your money interest-free with the client for up to three years — at a 12 percent working-capital cost, roughly ₹70 lakh of financing you provided without pricing it. Add guarantee commissions, blocked margin money and forgotten EMDs, and the locked-capital cost on government-heavy books rivals the net margin itself. Which is why the discipline pays three times over: price it in the tender, substitute it with instruments where the contract allows, and chase it with a register that never forgets. Run your own numbers through the ROI calculator — locked capital recovered is margin that was always yours.

Book a ProjectSathi demo and see every retention balance, guarantee expiry and recoverable across your projects on one screen.