Introduction
The aim of this blog post is to define what retention is, why construction contracts include retention clauses and how retention money is practicably held and released by the employer.
This blog looks at general principles of retention and makes some reference to the Joint Contract Tribunal (JCT) forms of contract, however parties to a construction contract should always refer to their specific terms and conditions when administering retention clauses as these may vary.
What is retention?
Retention is a sum of money, which is normally withheld from each monthly interim payment made to a contractor/sub-contractor during construction.
What is the purpose of retention in construction?
Retention is intended to provide the employer with an element of security that the contractor/sub-contractor will return to correct any defects during the defects correction period which is typically between 6 and 12 months after project completion and handover.
If the contractor/sub-contractor does not return and rectify any defects, then the retention money which is held by the employer may be used to source and fund the payment of another contractor/sub-contractor to correct the defects. The employer and its representatives should check on the ability to withhold retention, pay others to remedy defects and the relevant notices which should be given prior to appointing others to carry out remedial works.
How much retention is held by the Employer?
The amount of retention which can be withheld from each interim payment depends on the form of contract and particular conditions. However, in JCT contracts, retention is typically withheld based on a percentage of the value of the contract sum including the cost of any variations or changes to the contract sum.
The default level of retention contained within JCT ranges between 3% and 5% depending on the form of contract. If it is not the intention to deduct retention, then nil or zero should be entered.
When does the Employer release retention?
Typically, half of the retention money is released by the employer upon completion of the works. The balance is released when the rectification period or defects liability period has ceased and the relevant notices under the contract has been issued to this effect.
It should be noted that simple interest will typically become due for the late release of retention monies from the employer to the contract/sub-contractor, once contractual prerequisites have been completed.
Practical Considerations
On smaller projects the amount of retention held may not be large enough to incentivise the contractor/sub-contractor to come back and rectify the defective works. The employer may wish to procure a retention bond (a topic for another day) in lieu of deducting retention monies from interim payments to cover this risk.
JCT forms of contract note that the employer is a trustee for the contractor/sub-contractor of any withheld retention money. As such the employer has an obligation to set aside any withheld retention money in a separate labelled account, rather than simply holding funds within a regular client account. This is to safeguard the contractor/sub-contractor in the event that the employer becomes insolvent at any stage or during the defects liability period.