Retention – is it time to re-think ?
Most standard forms of building contracts have the provision to withhold a percentage referred to as retention from interim payments made to a contractor. This percentage is usually 3% although it can be a high as 5% in some cases. The idea behind retention is that it acts as an incentive, a carrot if you like, for the contractor to return to site following practical completion to make good any patent defects. Retention is returned to the contractor in two instalments; half on practical completion and the remainder on making good all latent defects to the satisfaction of the contract administrator. A similar system is used between main contractors and sub-contractors
It has been estimated that the total amount held as retention annually is several £billion.
Unfortunately, as straight forward as the above scheme sounds there have been calls for reform for a number of reasons;
1. Delays in releasing retention monies causing cash flow problems.
2. Sums held by contractors on sub-contractors are not ring fenced when main contractors become insolvent; Carillion’s collapse illustrates this.
3. A very large value contracts the sum held, 1½% may not be sufficient incentive for the contractor or sub-contractor to return.
An alternative to the above approach is the use of a retention bond or guarantee. The retention bond serves in lieu of traditional retention, and the bond amount reflects the amount that would have been held back. At the point of practical completion, the bond is reduced to reflect the amount that would be retained during the defect liability period. There is of course a cost associated with setting up a bond which smaller sub-contractors may find excessive.
Ultimately any change to retention, particularly its ring-fencing, is going to require clear legislation and time.