What You Need to Know About Retentions 1

Tuesday, December 30th, 2014
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Getting those retention payments often brings about arguments after the fact.

I see some pretty wacky arguments and valuations as parties fight over this last bit of cash. I thought it might be a good time to clarify those fundamental aspects of retentions that appear overlooked.

How retentions are valued

The contract will set a percentage, usually five per cent of the total contract sum. The thing most often missed is the basis upon which the total retention figure is based. It can be the contract sum with variations or without them. This is important as variations can dramatically alter the value of the work. Often, an upline contractor will include the value of variations and so the retention figure goes up. But when you look at the contract, the contract sum is defined as the amount agreed in the contract itself, with no reference to variations. This means that variations do not enter into it.

Either way, I often see retention amounts that do not relate to any contract sum or any percentage. Often this is because someone has made a mistake somewhere and it got transposed to subsequent claims. That is, no one bothered to recalculate the retention amount.

What percentage? As stated above it is usually five per cent but sometimes it is 10 per cent of the contract.

Amazing as it may seem, I have seen contracts which do not provide for retentions, but where the subcontractor has had retentions held for long periods of time. The opposite has also been true; a contract with retentions, but none held at all! That is, no one bothered to even look at the contract!

When is it payable?

You are entitled to claim your first retention when you reach practical completion and the final retention at the end of the defects liability period. Too many contractors think they can claim for their first retention before they complete on the assumption that it will be a long fight so they may as well get the ball rolling early. This is not the case; you can’t claim until you’re entitled to. That said, there are always arguments about whether or not completion has been reached. This will be defined in the contract, but if it isn’t then generally when the works can be used for their intended purpose you ought to be able to hold your hand up for that first retention. Many of these disputes end up in adjudication to decide if completion has been reached.

The final retention is payable at the end of the defect liability period. This is often 12 months from completion but I have seen them at three and six months. Again you can only claim this payment at the end of this period. If you are in dispute about the completion date then you need to either have that decided in adjudication or in contract dispute resolution.

What are they for?

Retentions are described as ‘security’ over the works. They act as a bond to give the up line contractor funds from which to draw on if the works need rectification and the contractor does not, or will not, rectify them. This is relevant, as often the up line contractor will seek to back charge for allegedly defective works well after completion and in addition to the retentions already held. Often the contractor will not want to return to site and would be pleased to have the cost deducted from retentions only to have that refused. In these situations it is simply an attempt at not paying what is due.

Keep in mind that retentions are there for a specific purpose. They are not an ‘all purpose fund’ for the party holding them.

When it’s over, it’s over. It’s amazing how often we see a head contractor insisting that the subcontractor carry out defect rectification well after the end of the liability period; and refuse payment of the final retention if they don’t. Because that’s what it is…a period for which the subcontractor is liable for defects to the work. When that period ends, so does the liability for any defects. After all, it is the head contractor’s job to review the work as the end of the period approaches and see that all defects are closed out.

So pay special attention to the clauses around your retentions. Five per cent is a lot. It is often your profit on the job. Pay attention to retentions.

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  1. Eric

    I have a slightly different understanding of the release of final retention. Under the ABIC-2008 contract, the final retention is due at the time of the final certificate, not necessarily the end of the defects liability period. This is important, because a final certificate will only be issued once all defects have been rectified, not just on the date. (Clause N10.)

    Another complication is that, a further defects liability period of equal length to the first period can be added in respect to work that has undergone significant correction. (Clause M13.) For example, a complex heating system had significant problems that were only fixed at the end of the original defects liability period, and a second defects period for that item was added. This delayed the final certificate, and therefore the release of the retention. The contract is silent on whether a portion of the retention unrelated to the second defects period can be released, so the whole amounted needed to be retained. That seems somewhat unfair to the contractor.

    Another issue that we address with cash retention held directly by owner and the requirement return the retention amount plus interest (Clause C2.)