Introduction

Retention is a crucial yet often misunderstood component of construction contracts. For many UK-based construction businesses, grasping the intricacies of retention can seem daunting. However, it is essential for ensuring project completion and safeguarding financial interests. This blog delves into the specifics of retention, guided by the RICS publication ‘Retention – 1st Edition 2012’, to equip you with the knowledge needed to navigate this complex area effectively.

What is Retention?

In construction contracts, retention is a predetermined percentage of the contract sum withheld by the client from each progress payment due to the contractor. This withheld amount serves as a security measure to ensure the contractor fulfills all contractual obligations, including rectifying any defects during the defect liability period. Typically, the retention percentage ranges from 3% to 5% of the contract value.

RICS Guidance on Retention

The RICS guidance ‘Retention – 1st Edition 2012’ provides comprehensive recommendations and best practices for managing retention in construction projects. Key points from the guidance include:

• Standard Retention Percentages: The guidance suggests standard retention percentages to be applied uniformly across projects to avoid disputes.
• Release of Retention: Clear guidelines on the timing and conditions for releasing retention sums. Typically, half of the retention is released upon practical completion, and the remaining half is released after the defect liability period, provided all defects have been rectified.

How Retention Works in Practice

Retention is applied throughout the duration of a construction project in the following stages:

1. Initial Retention Deduction: At each payment stage, a percentage of the amount due is withheld.
2. Interim Release: Upon reaching practical completion, typically half of the retention is released to the contractor.
3. Final Release: The remaining retention is released after the defect liability period, assuming all identified defects are rectified.

Common Issues and Challenges with Retention

Despite its importance, retention can pose several challenges:

• Cash Flow Implications: Retention can strain contractors’ cash flow, particularly for small and medium-sized enterprises.
• Disputes: Disagreements over the amount and timing of retention release are common.
• Impact on Subcontractors: Retention can trickle down to subcontractors, affecting their financial stability.

What Can Retention Monies Be Used For?

Retention monies serve several key purposes, primarily focused on protecting the client’s interests:

• Defect Rectification: If defects are identified during the defect liability period, the retention monies can be used to cover the cost of rectifying these issues if the contractor fails to do so.
• Ensuring Project Completion: In cases where the contractor fails to complete the project, the retention funds can be used to hire another contractor to finish the work.
• Compensation for Delays: If the project is delayed due to the contractor’s fault, retention monies can be used as compensation for the client’s losses caused by the delay.

By having access to these funds, clients have a financial safeguard that ensures their project can be completed to the required standards and within the agreed timeframe.

Strategies for Managing Retention

Effective management of retention is critical. Here are some best practices:

• Clear Contract Terms: Ensure all retention terms are clearly outlined in the contract to avoid misunderstandings.
• Regular Monitoring: Keep detailed records of all retention amounts and release dates.
• Communication: Maintain open lines of communication between clients, contractors, and subcontractors to address any issues promptly.

Alternative Approaches to Retention

In recent years, alternative methods to traditional retention have gained traction:

• Retention Bonds: A retention bond can replace the cash retention, offering security without impacting cash flow.
• Project Bank Accounts: These accounts protect retention funds, ensuring they are available when due.
• Trust Funds: Retention held in trust funds provides added security for contractors.

Conclusion

Understanding and effectively managing retention is vital for the success of construction projects. By adhering to the RICS guidance ‘Retention – 1st Edition 2012’, businesses can ensure fair and efficient retention practices. Review your current retention policies and consider seeking professional advice to optimize your approach.

References

• RICS Guidance: Retention – 1st Edition 2012