Anyone that works in the construction sector will be familiar with retentions - a proportion of money, often between 2% and 5%, that is deducted from payments made and held back until some later time. The idea is that by holding back this cash, the client is protected in case defects are discovered after the work is finished. The retention can then either be used as a lever to get the subcontractor to return and put things right, or as a pot of money to pay someone else to do it.
Typically, the first half of this deduction is released on completion of the construction project and the second half at the end of a maintenance period, which could be more than 12 months from the date the whole project was signed off. The retention details are specified in the contract.
Research undertaken in 2017 for the Department of Business Energy and Industrial Strategy (BEIS) found that retentions are used on around 65% of construction projects and range in size from 3.3% to 5.7% of the contract value. It also found that 89% of main contractors hold the retention in a main bank account rather than a special purpose ring-fenced account. This means that the sub-contractor's retention monies are at risk if the main contractor gets into financial difficulties.
The length of time, the relatively small sums of money involved and the expected difficulty to get paid often puts off subcontractors from even trying to get retentions paid. In fact, this happens often enough that some main contractors have made it part of standard operating procedure to count retention money as part of their own profit. Many will not pay out unless chased and will deliberately make it a very time consuming task to put off suppliers from making the effort to collect.
If you have completed your work in a satisfactory way, then you should be paid the retention money that is rightfully yours!
Not only that, but this money is straight to your bottom line without costs, so although it might only be 2.5% of your turnover, it could add 25% to 50% to your profit. Itís well worth going for.
Various terms are used in construction contracts to describe the completion of sub-contracted works.
'Practical Completion' is when the work is finished and signed off. At this stage, a certain proportion (usually half) of retention should be paid back to the sub-contractor. This figure is known as the first release of retention or first moiety of retention.
After this, there is a set period of time, typically 12 months, usually known as the 'Defects Liability Periodí. This is a kind of warranty period, during which the contractor, and by extension the sub-contractor, is obliged to rectify any defects.
The usual practice is for the works to be inspected at the end of the defects liability period. At this point, a schedule of defects is drawn up and issued to the relevant parties. When the relevant parties have rectified their defects, the works are inspected again. If everything is to satisfaction, the client issues a document called 'certificate of making good defects'. At this stage, the second release of retention is normally due to be paid out to the main contractor, and in turn it should pay this to its own subcontractors.
Before the Construction Act 2011 came into force, as a sub-contractor it was possible that the payment of your retention could be linked to something defined in the main contract between the main contractor and the client. In other words, you might not get your money back because of an issue that was nothing to do with you, but was nonetheless holding up the release of retention. The current Construction Act prohibits making payment to subcontractors being triggered by an event under another contract. What this means is that the terms of release of retention back to the subcontractor must be dealt with in your contract, and not linked to an event in the main contract.
It's important to note these key dates in your system so that you know when to chase. Once you have received the first half of the retention payment record the date of the Practical Completion and set a reminder to follow up in 12 months (or the period in the contract if different). Once this period has passed it means you have reached the end of the defects liability period. You can then apply for your second final retention payment assuming you have remedied any defects that may have arisen.
My Credit Controllers has long experience of helping construction companies with collection of retention payments. Get in touch now to see how we can help.