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Retention In Construction and Engineering Subcontracts

If you have an urgent problem relating to the collection of retention as a subcontractor in the construction or engineering industry you can call us now on 01773 715062.

 

Retention is money held by the Employer/Client as a safeguard against defects which may subsequently develop and which the Contractor may fail to remedy.

 

Retention is usually set at either 5% of the value of the works or 3% in the case of some (usually larger) contracts.  This percentage is then deducted from all the interim payments made to the main contractor who then deducts it from all his sub-contractors.  Once the sub-contract works are complete, the percentage to be deducted should be halved and what is described as the first moiety of the retention should be paid back to the sub-contractor.  This stage of the sub-contract works has different names in different contracts but “practical completion” is a common term.

 

Ordinarily there then follows a period commonly known as the “defects liability period”.  This is usually either 6 months or 12 months, and 12 months is commonplace.  During this period the contractor and therefore his sub-contractors have to make good any defects in the works.

 

Usually, unless remedial work is urgent, the works are inspected at the end of the defects liability period and a schedule of the defects is produced.  The contractor and his sub-contractors remedy the defects and when they have done so, the works are inspected again and what is commonly referred to as a “Certificate of Making Good Defects” is issued and the second moiety of retention is paid out.

 

The collection of retention money is not usually on most Specialist Sub-Contractors’ list of priorities.  Stop and think about that for a moment. 

 

If you are struggling with your finance why not check out our information on finance for construction and engineering subcontractors?

 

What is your actual nett profit as a percentage of sales?

 

If you are like most Specialist Sub-Contractors, your actual profit after overheads might be as low as 3% to 5% of sales.  If contractors are hanging on to 2½% of sales, they are effectively hanging on to your profit.

 

In most Specialist Sub-Contracting businesses, attention is focused on the now, the current jobs and the cash flow from those jobs.  This is, of course, extremely important and attention has to be given to those issues.  There will be many situations and problems competing for your time.  Those that make the most noise should not necessarily get the most attention.  It is easy to get sidetracked by things that take up a lot of time and energy but don’t have much payback.

 

However, if you set clear priorities, you can focus your team on the collection of retention money without affecting the rest of your business.

 

You simply do not have enough time and energy to do everything yourself.

 

In order to improve the collection of your retention money, you are probably going to have to delegate some of the work to others.  You will need to decide who is to be responsible for improving retention collection and who is actually going to do what.  You may choose to set all this out in writing so that everyone knows the respective parts they are going to play.  Do not fall into the trap of delegating the task to someone who does not have the skill and expertise to do the job.

 

For your team to be effective, they will have to overcome the likely problems they will experience.  Contractors’ accounts departments are good at putting off Specialist Sub-Contractors’ accounts departments when it comes to retention.  You may need to train and develop your people to improve their skills as the collection of retention requires contractual knowledge, persistence, good people skills and a degree of assertiveness.

 

There are many different contractual provisions but release of the first moiety of retention is normally linked to completing the works on site, the stage commonly referred to as practical completion.

 

Did you know that you can use the Is This Contract Onerous? service completely Free of Charge to establish whether or not your contract is onerous? Just click on this link or one of these Is This Contract Onerous?  links or the button on the left hand side of this page to find out more.

 

The date of practical completion is important for all sorts of contractual reasons and one way or another, this date needs to be confirmed to the contractor as soon as possible after the works have been completed.  The contractor will rarely issue a Certificate of Practical Completion, even if he is required to do so under the contract.

 

You should always ask the contractor to release the first moiety of retention and not wait for this to happen.  If your works on site are complete and if the contract says the first moiety should be released at this stage, then the first moiety should be released.  If the contractor does not release the first moiety then your team should investigate why he hasn’t.

 

It is essential to keep good records and copies of any correspondence your team sends.  This can be very useful in reminding the contractor just how often you have asked him for the money!

 

If the first moiety of retention is not released when requested, your system should flag this up and the account should be singled out for special attention.

 

Check carefully what the contract says.  If you have achieved the necessary stage that triggers the release of the first moiety, the contractor is in breach of contract if he does not release it.  This may sound very formal but, hey, it’s your money he is holding onto.  So remind him politely of this fact and cut through the administrative layers and speak to a decision-maker.  Usually the Commercial Manager or Director.  Show them your record of how many times you have asked for the money and insist politely that it is released immediately.  If necessary, collect the cheque.

 

If the contractor does not release the first half of retention when you have put pressure on him, you should take the matter extremely seriously.  It may be a sign that he is in financial difficulties and urgent action may be required. 

 

At this stage, you may need to seek professional advice and a very useful way in which you can action your retention collection is to use our Debt Due or Dispute Service, Just click on this link or on the button on the left hand side of every page.

 

Assuming that you do collect the first moiety of retention without too much trouble, your system then needs to monitor and control the second moiety.  Your system should record the date of practical completion and 6 or 12 months from this date you will reach the end of the defects liability period.  Assuming you remedy any defects that have appeared in your works, you are entitled (subject to what the contract says) to be paid the second moiety of retention. 

 

You need to bear in mind that release of the retention money to the main contractor by the employer/client will depend upon the mechanism in the main contractor’s contract with the employer/client.  This may provide for the employer or his Architect or agent to inspect the works and to issue a Certificate of Making Good Defects which triggers the release of the retention.  Clearly before such a certificate can be issued, any defects in the works have to be identified (usually by way of an inspection by the Architect or Employer’s Agent) and then corrected.

 

As every single element of the works is being inspected for defects, this will, by necessity, include the work undertaken by a number of different Specialist Sub-Contractors.  Any delay in remedying defects by any of the Specialist Sub-Contractors could delay the issue of the Certificate of Making Good Defects and thereby the release of your retention money.

 

There are some main contractors who, by their very nature and organisational ability, will be good at, and pride themselves on, their ability to deal with defects.  Similarly, there will be those contractors who will be motivated to deal swiftly and efficiently with defects in order to maintain their relationship with the employer/client.

 

Unfortunately there will be a number of main contractors who are dilatory and inefficient when it comes to remedying defects.  They may have no ongoing relationship to maintain and be totally lacking in motivation to remedy defects.

 

There is usually very little financial benefit to the main contractor in obtaining release of the retention money.  After all, dealing with the process is actually costing him money in staff time etc and once he has secured the release of the money, he should, in theory, be paying it straight out again to all of his Specialist Sub-Contractors.

 

In theory the main contractor should immediately pay out the retention money he has received.  Regrettably, one of the great weaknesses of the retention system so far as Specialist Sub-Contractors is concerned, is that it provides the contractor with a golden opportunity to receive money which he should be paying out but doesn’t.  This failure to pay out may be accidental but more often than not, it is quite deliberate.

 

The length of time the contractor can hang on to and utilise these windfall monies to run his business, will depend upon your ability to chase him for your money.  Some Specialist Sub-Contractors will not be very good at chasing their retention money and some may even write it off altogether.  The contractor simply takes advantage of your generosity.

 

Some main contractors will only pay out if the Specialist Sub-Contractor chases him for the money.  Other main contractors will deliberately set out to make it difficult for Specialist Sub-Contractors to collect their retention.  There are those even less scrupulous who are known to have a system in place for writing your money into their profits after a given period has elapsed.

 

High Speed Retention Recovery

 

Don’t let them get away with it.  It is your money and you are entitled to collect it when it is due

In the meantime here is a quick account of how one Streetwise Buddy benefited from the advice he got from a Virtual Team member.

Our Buddy, a roofing and cladding subcontractor was owed retention of £6,331.40 plus VAT on a job that had long since been finished. The retention should have been paid way back in April 2008 but despite our Buddy's best efforts it had still not been paid.

Oh how Contractors make excuses for non payment of retention!

With the Streetwisesubbie's help our Buddy has now received his money.

Time from asking Streetwise to getting paid-7 days!

That's high speed retention recovery for Specialist Sub-Contractors! 

So if you need to know how to recover retention from a Contractor, just Ask Streetwise.  

 

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