Withholding retention payments in construction can affect subcontractors’ cash flow and profitability.
Often used in the construction industry, retention is a fixed percentage of the total payment due for a contract, withheld for a period after the work is completed. It’s there to make sure that the contractor or subcontractor properly completes their contract, including fixing any defects by the end of the defect liability period (DLP). It is a form of guarantee for the client or the head contractor that the work will be completed to their satisfaction.
A big concern for subcontractors is getting retention amounts released and paid out to them at the end of a contract’s DLP. With small profit margins and cash flow challenges affecting many subcontractors, it’s essential to stay on top of retention payments. Here we explain what you should do to ensure your contracts are paid in full.
How do retentions work?
Retentions are held as security in case a contractor or subcontractor’s business collapses during construction or they fail to fix defects during the DLP.
They are typically held by the principal against the head contractor and by the head contractor against subcontractors, usually for 5 per cent of the contract value. The retention funds are usually deducted at the rate of 10 per cent of each progress claim until 5 per cent of the contract value has been reached. They are usually held in the form of cash but could also be a bank guarantee or insurance policy.
At practical completion, half of the retention (usually 2.5 per cent of the contract value) is released. The balance should be paid out at the end of the DLP, providing any defects have been fixed. This can typically take between six months and a year.
Many contracts have a limitation period in which the retention can be claimed. If you are not careful to stay on top of timelines you could lose a percentage of your contract value, which could affect your profitability on a contract.
Retentions can add up to a significant amount of money and have an adverse effect on your cash flow, especially where you are running multiple projects. Make sure you consider cash flow when entering into a contract with retentions.
Record keeping for retentions
It is important to keep accurate records of your retentions. To do this:
- Ensure your accounting or project management software is correctly set up to manage and record retentions.
- Follow the procedures described in the contract when making a progress claim.
- Find out the date for practical completion of the head contract. This is a critical date in all contracts.
- As soon as possible after your part of the contract has been completed, submit a ‘claim for practical completion’ for half the retention sum (typically 2.5 per cent of your contract value).
- Note in your calendar the end of the DLP and when it is over promptly submit a ‘final claim’ for the balance of your retention.
- Save copies of all correspondence sent and received relating to your payment.
What to do if you haven’t been paid
If your retention is not released, it’s important to follow up promptly to find out why. If there seems to be no valid reason why you haven’t been paid in full, there is help available. Contact us on 133 140 to speak to a specialist business adviser or access our dispute resolution service.
General advice disclaimer
The information contained in this article is general in nature and does not take into account your personal situation. You must refer to your conditions of contract to understand the specific percentages and clauses relating to retention money. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice.
