Retention And How It Works

May 17, 2015 by Mr Job Done

retention.

Retention is a hot topic in construction and it’s important for builders and contractors to understand it. It’s one of the biggest causes of legal disputes.

So what is retention?

 

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Retention is security held by a procuring contractor to guarantee the performance of a supplying contractor and in particular to safeguard against defects in the event that the supplying contractor fails to satisfactorily rectify them. The security is usually in the form of cash withheld (retained) but is often substituted for a bank guarantee or insurance bond.

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If you’d prefer a PDF guide to this post get it here

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Retention applies to both Headcontractor’s (both a procuring contractor and a supplying contractor) and subcontractors (generally a supplying contractor only) and is usually set at 5% of the value of the works.

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This percentage is deducted from all of the interim payments made to the headcontractor from its employer/client which in turn deducts it from all the subcontractor’s.

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how does retention work

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Practical completion and defects liability period

Once the headcontractor’s works are complete, the percentage of monies to be deducted as retention is generally halved with the other half paid out. This stage of works has different names in different contracts but “practical completion” is a common term.

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Ordinarily there then follows a period commonly known as the “defects liability period.” This is usually either 6 months or 12 months but can be considerably longer. During this period the headcontractor and subcontractors have to make good any defects in the works.

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Usually, unless remedial work is urgent, the works are inspected at the end of the defects liability period and a schedule of defects is produced. The headcontractor and subcontractors remedy the defects and, when they have done so, the works are inspected again and, if made good, the balance of retention is paid.

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retention and practical completion

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Collecting retention money

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Regardless of whether you are a headcontractor or a subcontractor, to ensure you get your retention back you must have automated systems in place to ensure you make and receive appropriate, written notifications at the time of practical completion and the expiration of the defects liability period.

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  • Notify the date of practical completion of your part of the works as soon as possible after they have been completed.
  • Your system should record the date of practical completion and should also remind you that you have reached the end of the defects liability period.
  • You should always request in writing to release retention and not wait for this to happen. This is usually in the form of a “claim for practical completion” and, after defects remediation, a “claim for final completion.”
  • If retention is not released you should investigate why ASAP. You may be entitled to interest on amounts paid late!
  • Bank guarantees are effectively equivalent to cash (worse, they’re often supported by mortgaged assets) and often even harder to get back. Don’t neglect to chase just as hard to get these back!
  • It is essential to keep good records and copies of all correspondence both sent and received.

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What to do if retention isn’t released

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If retention is not released when requested, your system should flag this up and the account should be singled out for special attention.

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  • Check carefully what the contract says. If you have achieved the necessary stage(s) that triggers the release of retention and have followed due process, your employer is in breach of contract if they do not release it and you may be entitled to suspend works.
  • Remind them politely of this fact and cut through the administrative layers and speak to a decision-maker, usually the Commercial Manager or Director.
  • Show them your record of how many times you have asked for the money and insist politely that it is released immediately. If necessary, offer to personally collect a cheque.

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If the procuring contractor does not release retention when you have put pressure on them, you should take the matter extremely seriously. It may be a sign that they are experiencing financial difficulties and urgent action may be required.

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Understand why retention may not be paid

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There is usually very little financial benefit to the headcontractor in obtaining release of the retention money. After all, dealing with the process is actually costing them money in staff time etc and once they have secured the release of the money, they should, in theory, be paying it straight out again to all of their subcontractors.

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Regrettably, one of the great weaknesses of the retention system is that it provides the employer / client with an opportunity to hang on to money which they should be paying out but don’t. This failure to pay out may be accidental but more often than not is quite deliberate and, indeed, essential to the funding their business – to the detriment of yours!

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The length of time another procuring contractor can hang on to and utilise retention to fund their business, will depend upon your ability to chase them for your money. Some contractors will not be very good at chasing their retention money and some may lose track of it altogether. The other party simply takes advantage of your poor management.

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Some procuring contractors will only pay out if the supplying contractor chases them for the money. Other contractors will deliberately set out to make it difficult for retention to be collected. There are those even less scrupulous who are known to have a system in place for writing your money back into their profits after a given period has elapsed.

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In short…..

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It’s your money!

Have systems in place to track key dates.

At the very least your system should record the date of practical completion and should also remind you that you have reached the end of the defects liability period.

Get on the front foot and request in writing to release retention and not wait for this to happen. This is usually in the form of a “claim for practical completion” and, after defects remediation, a “claim for final completion.”

If retention is not released you should investigate why ASAP. You may be entitled to interest on amounts paid late!

It is essential to keep good records and copies of all correspondence both sent and received.

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You can download our handy guide to retention right here

 

 

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