Overbury, which has a turnover of £184m, will pilot the policy this autumn and plans to introduce it across the division next year.
Steve Elliott, managing director of Overbury, said retaining money owed to subcontractors to cover defects discovered after the job had been completed was an "archaic form of insurance".
He said: "I think it's one of those things that the industry has always done – it's a really outdated way of working. People don't like change, but we don't anticipate any problems with doing this."
The trials will be carried out by an Overbury division specialising in partnered work with financial clients.
Elliott hopes that by 2004 the policy will be extended to Morgan Sindall's two other fit-out operations: Morgan Lovell, which does smaller works, and leisure and retail specialist arm Vivid.
Elliott said the move was prompted by Overbury's improved relations with its subcontractors. The firm holds regular meetings with them to assess performance and discuss best practice.
He added that Overbury planned to reduce the number of its subcontractors by a third – from 1500 to 500 – by the end of the year.
The trade and industry select committee has said it will be looking into the issue of retentions this autumn. Big-name clients such as John Lewis Partnership, BAA, Tesco and Slough Estates have abolished the practice.
Groups representing contractors have long called for the abolition of retentions. Last year the Constructors' Liaison Group, which wound up in the spring, sought MPs' support as part of a campaign against them.
Rudi Klein, chief executive of the Specialist Engineering Contractors' Group, said clients' views were changing.
"Clients find getting rid of retentions improves the level of trust and motivation among subcontractors as well as their cashflows," Klein said. "That means subcontractors can reciprocate by putting more money into training and improving their standards."
Klein said he was encouraging clients to promote the benefits of abolition to the select committee, which is due to report at the end of the year.
He added that his group would urge the committee to recommend abolition of the practice among public sector clients.