What is Retention (Contractors)?
Retention in the context of contractors in the UK refers to a portion of the contract payment withheld by the client or main contractor until the project or a specific phase of the project is completed to a satisfactory standard. Here’s a detailed explanation tailored for a UK audience:
- Definition:
- Retention: Retention is a financial arrangement in construction and other contract-based industries where a percentage of the payment due to a contractor or subcontractor is withheld by the client or main contractor as security against incomplete or defective work. This amount is typically released in two stages: upon completion of the work and after a defect liability period.
- Key Features:
- Retention Percentage: Commonly, 5% to 10% of the contract value is retained. The exact percentage is specified in the contract terms.
- Two-Stage Release: Retention is usually released in two stages:
- Practical Completion: Half of the retained amount is released upon achieving practical completion, meaning the project is substantially complete and fit for use, even if minor defects remain.
- Defects Liability Period: The remaining half is released at the end of the defects liability period (typically 6 to 12 months after practical completion), provided all defects have been rectified.
- Purpose:
- Quality Assurance: Retention ensures that contractors complete the work to the required standard and within the agreed timeline.
- Defect Rectification: It provides an incentive for contractors to return and rectify any defects or issues that arise during the defects liability period.
- Financial Security: Acts as a form of financial security for the client or main contractor, safeguarding against non-performance or substandard work.
- Legal and Contractual Considerations:
- Contract Terms: The terms of retention, including the percentage withheld, release conditions, and defects liability period, should be clearly defined in the contract.
- Payment Timelines: The contract should specify the timelines for the release of retention funds to avoid disputes and ensure timely payment.
- Construction Act Compliance: Retention practices must comply with the UK Construction Act 1996, which governs payment practices in the construction industry, including provisions for timely payment and dispute resolution.
- Benefits:
- Quality Control: Helps ensure that work is completed to a high standard and encourages contractors to address any defects promptly.
- Client Protection: Provides financial protection to the client or main contractor, reducing the risk of paying for incomplete or defective work.
- Incentive for Contractors: Encourages contractors to complete the project on time and address any issues during the defects liability period to receive the withheld funds.
- Challenges:
- Cash Flow Impact: Retention can impact the cash flow of contractors and subcontractors, especially smaller firms, as they have to wait for the release of the retained amounts.
- Disputes: Disagreements may arise over the release of retention, particularly if there are disputes about the quality of work or the rectification of defects.
- Administrative Burden: Managing retention payments adds an administrative layer to the contract management process.
- Example:
- A construction company is contracted to build a commercial property for £1,000,000. The contract includes a 5% retention clause. Throughout the project, 5% of each payment milestone is withheld, amounting to a total retention of £50,000. Upon practical completion, £25,000 is released. The remaining £25,000 is held until the end of a 12-month defects liability period and is released once all identified defects are rectified.
- Best Practices:
- Clear Documentation: Ensure that the terms and conditions of retention are clearly documented in the contract.
- Regular Reviews: Regularly review the project’s progress and quality to address any issues promptly and facilitate the timely release of retention funds.
- Dispute Resolution Mechanisms: Include clear mechanisms for dispute resolution in the contract to handle any disagreements over retention.
In summary, retention in the context of contractors in the UK is a practice where a portion of the contract payment is withheld to ensure project completion and quality. It serves as a safeguard for clients and main contractors but requires careful management to balance the financial impact on contractors and ensure timely resolution of defects and payment.
OTHER TERMS BEGINNING WITH "R"
- Recapitalization
- Recapitalizations & Restructures
- Receivables
- Recourse
- Recourse Period
- Refrigerated Carriers
- Rehypothecation
- Request for Proposal (RFP)
- Reserve Amount
- Reserves (Invoice)
- Restrictive Covenant
- Restructuring Advisors
- Return on Assets (ROA)
- Return on Assets (ROA)
- Revenue-Based Financing
- Reverse Factoring
- Revolving Line of Credit (RLOC)
- Route Trucks Delivery