Retention is security held by a procuring contractor to guarantee the performance of a suppling 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 case withheld (retained) but is often substituted for a bank guarantee or insurance bond.
Retention applies to both Head Contractors (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.
This percentage is deducted from all of the interim payments made to the head contractor from its employer/client which in turn deducts it from all the subcontractors.
Once the head contractor’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.
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 head contractor and subcontractors have to make good any defects in the works.
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 head contractor 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.
Regardless of whether you are a head contractor 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.
If retention is not released when requested, your system should flag this up and the account should be singled out for special attention.
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.
There is usually very little financial benefit to the head contractor 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.
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!
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.
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.
