Retention in Construction Contracts – Five Top Tips for Recovery

Retention is a well-documented source of problems in the construction industry and retained payments are often not released on time or, in some cases, not at all. Arbicon ADR Ltd, Chartered Quantity Surveyors, Claim Consultants and Adjudicators, explore the problem of retention and provide advice on how to tackle it.

MOST CONSTRUCTION CONTRACTS use retention, a percentage, often 5%, of the gross value due to the contractor, which is withheld by the paying party to ensure that the contracted works are completed to the specified requirements.

This retained payment is typically released in two stages upon achievement of certain ‘trigger events’; often the first stage is released on practical completion and the remaining half released on the making good of the defects in the works at the expiry of the rectification period.

Covid-19 has created a difficult current climate for many businesses. Unduly withheld retentions only add to the this, leaving contractors and subcontractors at a higher risk of cash flow problems and potentially insolvency.

Five top tips for recovering retention:

1. Check your contract terms

Your construction contract should contain clear and unambiguous terms setting out when the retention is due to be paid, together with further clauses allowing for interest on late payment. If you have not been paid, simply highlighting that your retention is due with cross reference to the contract terms can result in a swift payment.

Ensure you are satisfied with the retention provisions before you commit to the contract and avoid common pitfalls including:

• Excessively long defect liability periods
• Unduly high percentages being withheld; and
• Prohibited illegal clauses such as those which make payment conditional upon performance under another contract or on a paid-when-paid basis. 

2. Monitor When the Retention is Due

Record the date when your retention will be due and monitor progress of the contract to ensure the retention is claimed on this date. The recovery of retention is easier to manage where you have a defined process and timescale. This, in turn, leads to improved cash flow.

3. Records, Records, Records

It is crucial to keep good records in the construction industry for a multitude of reasons. Where retention is concerned it is especially important to keep records that relate to the ‘trigger events’ to prove that they have been achieved.

Examples

• If the first half of retention is due on Practical Completion and the second half is due 12 months later, ensure you have a practical completion certificate documenting when the work was completed.
• If the retention is due for release after making good, a specified list of defects produce contemporaneous evidence by way of report, photographs, emails and letters that proves the work has been undertaken.

By collating this evidence, you can demonstrate you have fulfilled your contractual obligations. In turn, it demonstrates your entitlement to be paid, making recovery easier.

4. Follow the Contractual Process

Now that you have your dates correct and evidence of entitlement, you should check your contract for the process that must be followed to request and release your retention. It is not uncommon for subcontractors and contractors to chase their retention by only issuing a letter asking for its release. Yet the contract often stipulates they need to follow a specific process, such as issuing an application for payment. If you do not follow the correct process, the sum is unlikely to be released.

5. Get Help Demanding Retentions

Recovering unpaid retention can be challenging, time consuming and burdensome. Consulting and utilising the services of a third party can be of great assistance.

Specialist companies know how to challenge parties who are unfairly refusing to release retentions and frequently assist in the recovery of retention. They use a combination of contractual expertise, debt recovery techniques, and referring payment disputes to adjudication to obtain a quick decision.