Retention Flashcards
Why is retention included in contracts?
- It’s a sum at each payment notice to provide client security that the contractor will return to correct any defects during the defects liability
- Retention can be used to fund payment of others to correct the defects if the contractor does not return
How may retention be applied?
% of the value of contract works
May have caps or limits
Some contracts may have retention free amounts
Retention bonds
What are the standard retention releases on some of the contracts you have worked on?
all 3% except intermediate (and minor) which is 5%
In intermediate and Minor works contracts, the % is stated is the value of the works that will be paid, rather than the value with held i.e 95%
What contracts do not have provisions for retention bonds?
Intermediate, prime cost and Minor contracts
What if no retention is to be taken?
This may be agreed in the contract
Would require ‘nil’ to be entered - as no % entry would result in the default applying
Would expose client to risk, unless a retention bond was agreed
What does retention apply to?
Generally to all works and materials on & off site
Would depend on the contract
How does a retention bond differ to a Performance bond?
A performance bond is to provide surety for non-performance of contractual duties
Retention bond is to rectify failures
Where both - employer has first use of retention
How do retention bonds work?
If selected, retention isn’t deducted but the statement is still prepared to show what would have been
Provided to Employer prior to date of Possession
Should state max aggregate sum & expiry date - included in contract particulars
If retention deductions exceed bond value, the bond can be increased by the contractor or the excess retention can be deduced
When is retention released?
At Practical Completion half is released
Final retention is released 28 days after end of DLP or Certificate of Making Good or the Final Statement is issued
How are retention monies held?
Retention is held in a separate bank account - designated to show the amount is the retention held
Except where LA, the Employer is entitled to any beneficiary from the moneys
What needs to be entered in to the contract for retention?
In the CP’s
Retention % or ‘nil’
Retention bond if applicable - expiry date and maximum aggregate sum
How does retention differ between JCT & NEC?
No retention bonds
Entered into the contract in Option Clause X16
No release at Sectional Completion
Final release on Defects Certificate
Where a performance bond is required, the retention clause is not normally used
How does retention differ between JCT & FIDIC?
Where sectional completions, only 40% of the proportional value is released. At the end of the DLP for the section, only a further 40% is released
Contractor is required to include retention deduction in monthly statements
Retnetion bonds are an option on some suites
What problems can occur with retention release?
- Any sum set off against retention where defective works should be fully justified
- Some contracts don’t release defects certificate until all defects are complete which can be a significant period
- Further down supply chains the retention may not be significant enough to incentivise correction
- On occasion the cost of administering the retention may be higher than the proportion of the actual retention
How are issues of insolvency dealt with?
JCT requires employer to act as trustee for the contractor, meaning the funds are in a separate account
If a client is liquidates, banks charge over fund will take precedence over the contractual obligation of the employer to place funds in a separate account - i.e. priority won’t be to return the funds to the contractor
You’ve also talked about retention, where would you find that information in a Contract?
Contract Particulars
What is retention?
An amount deducted from the amount due to contractor at interim payments to provide client security that contractor will return to correct any defects during defects liability period
Set out in Contract particulars. Standard rates will apply if nothing is entered (varies with different contracts).
A % is released upon completion of works (usually approx. half) but prior to end of defects liability period
Where contractor does not rectify works, retention can be used to rectify
What is a retention bond?
A retention bond is an agreement between the employer and a surety that acts as a guarantor should the contractor fail to carry out the works or fail to remedy a defect. Instead of traditional retention being held from payments to the contractor, the equivalent amount is held against the retention bond, which the employer can call upon if necessary. The value held will reduce after Practical Completion as half is released.
Why would you use a retention bond?
Retention bonds are used to avoid the problems associated with retention being held. They alleviate cash flow issues for subcontractors in particular. Under the JCT SBC the QS should however still prepare a statement of retention that would have been deducted from payments, but there is no such requirement under the JCT D&B. Bonds are typically in a maximum aggregate i.e. % of the contract sum, therefore if the sum is exceeded the bond can either be increased or the excess retention can be deducted from interim payments. If both a performance bond and retention bond have been provided, the retention bond should be called upon first.
Retention bonds benefits and risk
the benefit of having a retention bond in place in respect of subcontract terms and that this might see less risk priced in by subcontractors and the main contractor. There is also less chance of the contractor / subcontractors becoming insolvent - helps with contractor cash flow
A disadvantage to clients might be that they might have to satisfy certain conditions before calling upon the bond, therefore an on demand bond is best. (options are conditional or on demand)
