Frequently Asked Questions - Retention
Different contracts have different procedures. Some such as the NEC are very simple, others such as JCT Sub-Contracts in the UK or RIAI Sub-Contracts in Ireland are complex. Invariably there must be adequate notice and sufficient detail before the set-off is valid.
The importance of serving a withholding notice on time and making it a valid notice cannot be emphasised enough. If this is not done then the right to set-off may be lost.
The only money which the Employer is entitled to hold after Practical Completion is the retention money. If the Certificate of Completion of Making Good Defects has been issued under a JCT form, then the second half of the retention must be released.
If there are defects apparent at any stage up to the issue of the Certificate of Practical Completion, then either the employer does not pay for that part of the work which is not done properly, or the Certificate of Completion of Making Good Defects is not issued. If there is a suspicion of latent defects, it would be very prudent to have an investigation done prior to the end of the defects liability period.
Where there are no suspicions of latent defects and withholding retention is merely an insurance in case of latent defects, then the Employer does not have authority to do this. If Employers wished to amend the JCT Contract to protect against such situations, it would be quite easy to do so. For example the retention could be released at the end of six years. Contractors should resist such a move vigorously, as it does not make good commercial sense and definitely does not assist in the profitability or the company's cashflow.
If an Employer felt that the retention was not a sufficient amount of money, then the sum being held could be increased by amending the contract to 10% as is very common overseas. This might have an effect on tender prices in that tenders would be higher and have a higher percentage for profit and overheads to reflect the greater liability being undertaken by Contractors.
Most people expect the answer to be very simple as it is either released on Practical Completion for JCT Contracts or at Substantial Completion for ICE Contracts. This, of course, is true but it ignores the fact that many contracts are not in those forms or that there may be no provision for the deduction of retention monies at all.
The position is much more complicated with sub-contracts. Many sub-contracts do not provide for retention and material suppliers will rarely allow for retention in their standard terms and conditions.
Those sub-contracts which do provide for retention may either provide that the first half is released at practical completion of the main contract works, or is released when the sub-contract works are substantially complete. There can be a long time between those two dates. When negotiating at the tender stage, where possible express a release of retention when the sub-contract works are substantially complete and not on practical completion of the main contract works. These are strategies to improve cashflow and profitability. Individually these steps may appear small, but cumulatively over many contracts they may have substantial impact on getting paid, cashflow and profitability.
Thus, the terms of the contract will decide what event triggers the release. The most common event is practical completion but that in turn introduces a level of uncertainty because practical completion is often not clearly defined.
There are a number of steps that you can take to make sure that your retention is released as soon as it is due to you:
- apply early;
- mark dates on a calendar as to when retention should be released for example the time of the issue of the certificate of completion of making good defects. Mark when to request the release and when to receive payment;
- keep asking;
- take action!
Every standard form of contract in the construction industry has some form of provision for retention or reserve. As with all issues like this, the starting point is to look at the contract and find out what it actually says.
DOM/1 is a typical contract, the provision for dealing with retention is at Clause 21.5 which provides:
- up until Practical Completion, the Contractor can deduct the percentage which is stated in the Articles of Agreement. The Articles of Agreement provide that if no percentage is inserted it will be 5%. In many instances this rate may be negotiated to 3%. It is worthwhile providing evidence that a percentage of 5% is not required from previous projects completed within a 6 year period.
although the reduction in the retention percentage may appear minimal, it may have a disproportionate impact on a contractor's profitability. When you consider 2% of PSX thousands of pounds retained by the employer/contractor over the period of the contract and 12 months after Practical Completion of the works. Example contract sum PS300,000.00, retention at 5% and 3% will be PS15,000.00 and PS9,000.00 respectively, a difference of PS6,000.00 over a possible period of 2 years. Thus, a 2% reduction would make available to a contractor an extra PS6,000.00, which should be working for him.
upon practical completion but before a Certificate of Completion of Making Good Defects is issued, only one half of the percentage of retention can be deducted. Ensure you have a calendar marked with dates on which retention should be requested and take action on those dates as they occur.
upon the issue of a Certificate of Completion of Making Good Defects, all retention monies are to be released, by way of an interim payment, to the contractor. Again this date should be marked on your calendar as two dates, when to request the release and when to receive payment.
Remember that if a contract or sub-contract does not make specific provision for retention then the employer/contractor has absolutely no right to withhold retention. If retention is provided for, the percentage and release dates may vary accordingly. First check if the contract allows for the taking of retention, and secondly check the rate of percentage. Negotiate a lower rate where possible. Lower rates add substantially to the profitability of a contractor.
In some instances a contractor/sub-contractor can wait for the release of retention for long periods after the works have been completed. Use effective procedures to chase these monies on a regular basis. It may only take a few letters and threats of adjudication or arbitration. These actions may only be minor but accumulatively they add substantially to the profitability of a company and its cashflow.
It is our experience that retention and percentages of retention are accepted as standard issues in most contracts. This general acceptance should not be the norm and should be challenged whenever the issue arises. It is particularly unfair to groundwork sub-contractors or structural steel sub-contractors who may complete their works long before practical completion of the main contract. If they have to wait a very long time for release of retention on large sums, this may have a disastrous impact on cashflow and profitability. In such circumstances, it is definitely worthwhile negotiating for a lower rate or zero retention where possible. In some instances the monies involved in retention equate to the profit on the project.
It has recently be described as unfair in the in the UK by the House of Commons Report "Construction Matters" printed on 8 July 2008.