Retention of monies can be a difficult and contentious issue, and for contractors knowing your rights and reading contracts carefully are vital.
Retention is the withholding of payment until a contractor completes the work free of defects and omissions, although this will generally be subject to the wording in the contract which may otherwise give the contractor the right to partial release of the retention monies.
A contractor is generally paid in instalments over the course of any project/contract, with a percentage of those payments withheld as retention. Thus the retention fund represents an accumulated fund built up over the entire duration of the contract.
Problems that arise
Obviously contractors have nothing to worry about if they have fulfilled their duties under the contract and completed the works free of defects. Unfortunately sometimes things go wrong.
“Unfortunately retentions have also long been used as a poor excuse to withhold or avoid paying contractors”
Both JCT and ICE detail the complex rules for the treatment of retention, which intend to balance the respective interests of the contractor and employer.
This is the sense of the employer’s interests being protected in the event of any latent defects appearing, and the contractor’s interest in the sense that the money retained is essentially theirs.
Retention monies represent a percentage of the total value of the contract and have long been an essential safeguard for employers against the threat of defects, not to mention non-completion.
Unfortunately retentions have also long been used as a poor excuse to withhold or avoid paying contractors and are now viewed by many as an unfair and potentially problematic arrangement.
The employer, or the contractor in relation to sub-contracts, must comply with the contractual provisions, not only for the deduction of retention monies but also their release.
How to protect yourself
Knowing your rights as a contractor will help ensure you get paid on time and in full by avoiding certain pitfalls. The main thing to do here is to read your contract.
One thing that any subcontractor should seek to ensure is that the release of their retention monies is not tied to the completion of the main contract and/or the release of the retention fund under that main contract.
Has the deduction been made in accordance with the contract, in the right amount and subject to the correctly completed, dated and served notices? Is the percentage deducted or held correct?
The amount will change on practical completion and the period that it can be held will usually be negotiated on a contract-by-contract basis. What does your contract say?
Another way for the contractor to limit the effects of problems arising is to ensure the retention monies are held in trust or to insist on a retention bond.
“Knowing your rights as a contractor will help ensure you get paid on time and in full by avoiding certain pitfalls”
The purpose of the trust is to ensure that, in the event the party holding the monies is insolvent, those monies will not become mixed with other sums and or accounts and can be easily identified and thus paid in accordance with the contract.
The trust will also normally impose (through the terms of the contract) obligations to pay interest on the amount held at specific rates and in the event of late or non-payment.
If the retention is not held on trust and the paying party is insolvent, then it is almost certain the retention monies will be subsumed with the rest of the accounts, and effectively lost.
The retention bond makes use of a surety provider to act as a guarantor between contractor and employer, ensuring the contractor will be paid in the event of asubcontractor’s non-performance, and that the contractor will have a healthy cashflow.
The National Specialist Contractors Council claims that cash retentions are an out-dated practice and that there are better ways for employers to guarantee the quality of workmanship from their contractors.
Back in 2011, the NSCC launched a ‘No Retentions Policy’ in Scotland designed to help contractors resist cash retention policies.
How the rest of the UK treats this approach is yet to be seen, but it is clear the industry is waking up to the need for certainty of cashflow – and retention must not stand in the way of this.
Bill Barton is a partner at Barton Legal