Issues with Retention Monies
Most of you will be aware of the “Retention” clauses in construction projects, but really who do they benefit? The simple answer in my opinion – the Main/Principal Contractor. The main issue I have with retention monies is with the cashflow of small to medium sized businesses/subcontractors.Typically, depending on the size (really value) of the contract, this can either be 3% or 5%.
Main Issues:
- The Principal Contractor is in control of when your retention monies are released.
- An individual involved at the beginning of the process (i.e. a groundworker or steelworker) may not receive their due payment until PC (Practical Completion) is achieved – in some cases this could be a good 6 months to a year down the line.
- Potentially, workers may then have to wait a further year for the release of the remaining retention monies.
- Principal Contractors hold onto retention monies and in some respects can enhance their own cashflow.
- A Sub-Contractor’s work will normally entail the supply of labour, materials and plant. Normally the labour is their own, but they may need to hire plant and certainly procure materials. However, you don’t hold back 3% or 5% of a plant-hire or material supplier do you? In theory, you as the subcontractor is financing the project.
- At tender stage, you can build in some percentage when the Main Contractor comes looking for their huge pots of Discount, but you can’t take account of retention as you would become uncompetitive.
- Say if we pay you all retention upfront, what additional incentive/discount, can you offer? Probably 9/10 times you can’t afford it, but it can assist cashflow, and you are giving away money that is rightfully yours in the beginning.
Solutions:
In today’s contracts (and it’s surprising the amount of people who don’t know this), retention release is now not lawfully tied back to key Main Contractors’ dates, but those of your own work. In other words, you don’t need to wait months and months for your retention. It has even been suggest that retention clauses do not comply with the Housing Grants, Construction & Regeneration Act
(which sets out requirements for the withholding of payments) (ref Klein, Building, 30 June 2000).
(Source: http://www.designingbuildings.co.uk/wiki/Retention_in_construction_contracts)
THIS WILL BE DISCUSSED IN MORE DETAIL IN A FUTURE BLOG!!
Depending on the size of the contract and indeed the amount of work you have on, there might be a commercial advantage of having a retention bond. This is also something that can be added in your own prelim for the project. Not all Contractors will accept this method, but it is certainly something worth considering if it makes financial sense.
A retention bond is where the contractor agrees to pay the amounts which would otherwise have been held as retention, but instead a bond is provided to secure the amount that would have been retained. As with retention, the value of the bond will usually reduce after Practical Completion has been certified.
(Source: http://www.designingbuildings.co.uk/wiki/Retention_in_construction_contracts)
