Last edited 01 Dec 2016

Retention in construction contracts

Contents

[edit] Introduction

Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate, that is deducted from the amount due and retained by the client. The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract. Retention can also be applied to nominated sub-contractors, and the main contractor may also apply retention to domestic sub-contractors.

Half of the amount retained is released on certification of practical completion ('substantial completion' for Institution of Civil Engineers (ICE) contracts) and the remainder is released upon certification of making good defects (or 'final statement' for design and build contracts such as Joint Contracts Tribunal (JCT) DB 16).

Interim certificates should make clear the amount of retention and a statement should also be prepared showing retention for nominated sub-contractors.

The contract may require that retention is kept in a separate bank account and that this is certified to contractors. In this case, the client will generally keep any interest paid on the account.

NB. On construction management contracts, a separate certificate of practical completion must be issued for each trade contract and so there are a number of defects liability periods. This means that retention must be released as required for each individual trade contract. The same is true on management contracts, where each works contract must be certified individually.

[edit] Reform

Retention can be a large amount of money and may cause cash flow problems for contractors. It has even been suggest that retention clauses do not comply with the Housing Grants, Construction and Regeneration Act ( which sets out requirements for the withholding of payments) (ref Klein, Building, 30 June 2000).

A possible alternative to retention is a retention bond, where the client agrees to pay the amounts which would otherwise have been held as retention, but instead a bond is provided to secure the amount that would have been retained. As with retention, the value of the bond will usually reduce after practical completion has been certified.

Other proposals include putting retention in a trust account, and the construction supply chain payment charter proposes abolishing retention by 2025.

In 2014, Debbie Abrahams, MP said: “There is evidence that cash retentions have been used to shore up the working capital of local authorities and tier 1 suppliers... There is a key concern that if tier 1 suppliers become insolvent, the small businesses in the supply chain are at risk of losing their retentions.” Ref Construction Enquirer 24 November 2014.

Read about retention bonds here.

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