Employees typically expect to be paid after they have completed their work. They will work for an agreed amount of time before receiving payment for the hours they have worked.
However, the construction industry has a different payment process and policies.
For example, in a large construction project, the principal contractor needs to buy many materials upfront and outsource elements of the project that may take weeks, months, or even years to complete.
The challenge is to find a process that protects both the client’s and contractor’s interests. If the client pays the full price upfront, they have no guarantee that the contractor will complete the job. However, the contractor needs incoming cash flow to maintain their business and keep the project moving.
This is where retentions come in.
What is a contract retention?
When a principal contractor wins a bid for a large construction project, a proportion of the initial payment is set aside to fund the start of the project. This retention is the amount of money that the client keeps until the project is complete. The value of the retention is often set as a percentage of the total project cost, typically 5% or 10%.
What is the problem with retentions?
Contract retentions can cause a number of problems, including:
- Disproportionately affect smaller subcontractors: Small subcontractors have less financial capacity than larger contractors, so retentions can put them in a difficult financial position.
- Impact legal recourse on pursuing payments (“liens”): In some jurisdictions, subcontractors have the right to place a lien on a property to secure payment for their work. However, retentions can make it more difficult for subcontractors to enforce their lien rights.
- Affect cash flow: Retentions can tie up cash flow for both contractors and subcontractors, making it difficult for them to operate their businesses efficiently.
Statement from George Goss, Director, Goss Environmental Coatings Ltd:
“The amounts involved in small works retentions for hygienic cladding, hygienic coatings, wall protection and fast track decorating works will never cover the costs for subcontractors to go back to fix issues. This is dependent on goodwill and cooperation and reputation… …so what is the point of them?”
“Retentions create additional work for everybody. Our persistent staff chase payment for over stretched contractors and commercial managers raising paperwork (or not) to pay them. This leads to lots of emails, lots of phone calls, lots of hassle and lots of nervous energy. I think a retention on a subcontract of total value of less than £10k is meaningless, so why not get rid of them and help us all get more productive as a country and an industry?”
Retentions can also have a negative impact on productivity in the construction industry. For example, a subcontractor who is waiting to be paid for a retention may be reluctant to start work on a new project until they receive payment. This can lead to delays and inefficiencies in the construction process.
There are a number of alternatives to retentions that could be used to protect the client’s interests, such as:
- Performance bonds: A performance bond is a type of insurance that guarantees that the contractor will complete the project according to the terms of the contract.
- Letters of credit: A letter of credit is a written commitment by a bank to pay a certain amount of money to the contractor if they meet certain conditions, such as completing the project on time and to budget.
- Project management software: Project management software can be used to track the progress of a project and ensure that the contractor is meeting their obligations.
These alternatives can be more expensive than retentions, but they may be worth the cost if they can help to improve productivity and reduce the risk of disputes.
Conclusion:
Small works retentions can have a number of negative consequences for both contractors and subcontractors, including financial hardship, reduced cash flow, and delays. There are a number of alternatives to retentions that could be used to protect the client’s interests while also improving productivity in the construction industry.
