Retentions are often used on construction projects. This article explains what they are and why you should consider them.
Construction retention refers to a portion of the payment that is withheld from a contractor until the completion of a construction project. This practice is partly used to ensure that the contractor performs the work to the required standards and completes the project on time.
Retentions are typically a small percentage of the total contract value, ranging from 3% to 10%. The amount of retention is usually agreed upon by the parties involved in the construction project, including the employer, contractor, and subcontractors.
There are several reasons why construction retentions are used.
There are several reasons why construction retentions are used. One of the main reasons is to protect the employer's interests in case the contractor fails to complete the work or does not meet the specified quality standards. Retentions incentivise the contractor to perform the work properly and on time.
Another reason for retentions is to cover any costs that may arise from defects or deficiencies in the work. For example, if a contractor fails to properly construct part of the works, the employer may be required to pay for the repairs. Retentions can be used to cover these costs.
Construction retentions are typically held in a separate account until the completion of the project. Once the project is completed, half of the retention is released, and the final retention amount is released to the contractor after the expiry of any defects period.
There are some drawbacks to the use of construction retentions.
One of the main concerns is that they may burden the contractor financially. Retentions can significantly impact a contractor's cash flow, especially if the project is large and the retention amount is a significant portion of the contract value. This can lead to financial difficulties for the contractor, particularly if they have other ongoing projects that require funding.
In addition, the use of retentions can create a strained relationship between the employer and contractor. The contractor may feel they are being unfairly held back from receiving payment, while the employer may feel that the contractor needs to meet the required standards. Both parties need to communicate and work together to resolve any issues that may arise.
There is an alternative to construction retentions that is worth considering. Retention bonds are a type of financial guarantee that protects the employer if the contractor fails to complete the work. These are usually an on-demand type of bond for a similar value as the retention sum would have been. However, as these are procured from an external surety, there is an additional cost for a retention bond.
In conclusion, the use of construction retention is common practice in the construction industry and is used to protect the interests of the employer and ensure the quality of the work. While they can create some financial challenges for contractors, they are an important tool for managing risk and ensuring the successful completion of construction projects.
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