Retention

Question 1

Why is retention included in contracts?

Answer 1

• 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

Question 2

How may retention be applied?

Answer 2

% of the value of contract works
May have caps or limits
Some contracts may have retention free amounts
Retention bonds

Question 3

What are the standard retention releases on some of the contracts you have worked on?

Answer 3

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%

Question 4

What contracts do not have provisions for retention bonds?

Answer 4

Intermediate, prime cost and Minor contracts

Question 5

What if no retention is to be taken?

Answer 5

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

Question 6

What does retention apply to?

Answer 6

Generally to all works and materials on & off site
Would depend on the contract

Question 7

How does a retention bond differ to a Performance bond?

Answer 7

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

Question 8

How do retention bonds work?

Answer 8

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

Question 9

When is retention released?

Answer 9

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

Question 10

How are retention monies held?

Answer 10

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

Question 11

What needs to be entered in to the contract for retention?

Answer 11

In the CP’s
Retention % or ‘nil’
Retention bond if applicable - expiry date and maximum aggregate sum

Question 12

How does retention differ between JCT & NEC?

Answer 12

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

Question 13

How does retention differ between JCT & FIDIC?

Answer 13

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

Question 14

What problems can occur with retention release?

Answer 14

• 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

Question 15

How are issues of insolvency dealt with?

Answer 15

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

Question 16

You’ve also talked about retention, where would you find that information in a Contract?

Answer 16

Contract Particulars

Question 17

What is retention?

Answer 17

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

Question 18

What is a retention bond?

Answer 18

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.

Question 19

Why would you use a retention bond?

Answer 19

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.

Question 20

Retention bonds benefits and risk

Answer 20

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)