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I bought a car the other day. When the time came to settle up, I told the dealers I'd only be paying 95% of the agreed price and I'd hang on to the rest for 12 months in case the car broke down. No problem, they said, and handed over the keys.

I'm kidding, of course. If any car dealer were really stupid enough to agree those terms, you wouldn't be able to get near its showroom for the queues. Yet, in the construction industry, it doesn't just happen occasionally: it's the norm. I'm talking about the bizarre practice of retention, whereby a client or main contractor will hold back a portion of the subcontractor's certified account (usually 5% during the construction period, reducing to 2.5% for a year or more afterward) as a form of bond against latent defects.

Let's think about this for a moment. We work in an industry with exceedingly tight margins. If you retain 2.5% of the job's value, you're asking a supplier to forego most (if not all) of his profit until some indeterminate point in the future when you may decide to pay the balance. So how does that supplier grow his business in the meantime? How does he pay his staff? How does he pay his own suppliers? How does he feed his family? Not my problem, you may think – but you'd be wrong, for two reasons.

First, the whole idea of retention is to safeguard against defects that may only emerge in a job after it's completed. Yet you've already got that safeguard in the form of a contractual warranty. All you achieve by retaining 2.5% is to strip the profit out of the job – which, in turn, increases the financial pressure on your supplier (who may have to wait as long as two-and-a-half years to earn his money). If he goes bust because of that pressure, you'll have to find someone else to fix any problems that arise – and if the cost exceeds the 2.5% you retained, you're not going to be feeling quite so clever about it.

How does the supplier pay his staff? How does he feed his family? Not my problem, you may think – but you’d be wrong

Second, and more likely, the supplier will hedge his bets. Knowing that you'll be sitting on his profit for at least a year, he'll pad the cost to give himself a bit of leeway. So, in return for retaining 2.5%, you'll end up paying a whacking extra premium. You'd have to be earning a pretty good rate of interest on the 2.5% to make that a commercially sound decision.

The truth is that retention is another one of those confrontational business practices that's best consigned to the "bad old days". It's a strong-arm tactic that isn't really good for either side – one of the reasons most partnering agreements have done away with it altogether. No business relationship that's based on any measure of trust, fairness or common sense would have room for a retention clause. Everyone would agree that it's important to protect against the possibility of defects or non-compliance – but in a way that makes sense for both parties.

Surely it's simpler and better to rely on an effective warranty clause: most subcontractors in my line of work will guarantee against defects for at least 12 years. If you're worried about a supplier defaulting on that warranty (which rather begs the question of why you're dealing with them in the first place), you can always take out insurance to cover against it. The cost of the premium would be absorbed into the overall project cost, which means the subcontractor wouldn't have to bear the financial burden of his profit being retained. What's more, you wouldn't have to worry about your price being artificially inflated to compensate, because an insurance premium would cost a lot less than the 2.5%.