What Is Retention in Construction?
The meaning of term Retention in Construction can be described as a percentage of amounts that are certified as due to the contractor on an interim certificate, that is deducted from the amount due and retained by the client in construction related works.
The purpose of Retention in Construction is to make sure that the contractor properly completes the construction or activities required of them as per the contract.
Retention in Construction is needed because it provides a fund for rectifying defects in construction projects.
Retention in Construction provides an incentive for the contractor to complete the construction project on time and without defects.
A large sum of retention money may cause cash problems for the contractors which is why it has been suggested that retention money is not applicable with the Housing Grants, Construction and Regeneration Act, which makes them free from withholding of payment.
A possible alternative to retention is a retention bond, where the client agrees to pay the contractor the amount which would otherwise have been held as retention, but instead the retention amount a bond is provided to secure the amount that would have been retained. The value of the Retention Bond will usually reduce after practical completion of the project has been certified.
What Do You Mean by Retention Money in Construction?
Retention Money in Construction is described as the sum of money held by the client as a safeguard for any defects or non-conforming of construction work by the contractor.
In most of the construction projects, the amount of Retention Money to hold by the client in each progress claim is 10% of the construction work done and up to 5% of the contract sum.
Retention Money in Construction provides safeguard to the employer from defects which can occur during the defects liability period in construction projects if the contractor does not respond accordingly to the contract terms.
The contractor has to completely finish the whole construction work under his contract from the client in order to receive the Retention Money amount which has been withheld by the client.
Retention Money used in construction is subjected to limit as per the stated percentage in the contract which is known as ‘Limit of Retention’. The allowable ‘Limit of Retention’ is 5% of the contract sum. Therefore once the limit of retention money is reached, you cannot further deduct retention money.
What Is the Purpose of Retention Money?
The purpose of retention money is to provide protection to the employer. The purpose of retention money is to give the idea of the importance of completing construction work or signed projects as per the terms and designs stated by the client in the contract.
The purpose of retention money is to make the contractor complete the scope of construction work under his contract in order to receive the retention money amount withheld by the client.
The purpose of retention money is to protect the employer against the money he pays in monthly progress claims.
With such retention money held by the employer, the contractor takes the responsibility to complete the construction project as per the terms, design and quality stated in the initial contract.
The purpose of retention money is providing security in the form of a source funds when the contractor fails to complete the construction work as per the contract they can rectify the defects in construction by the retention money.
Contract retention provides assurance to an individual that the construction work will be completed. For example, if someone hires a contractor to remodel his office, he will want to ensure that the contractor will finish the remodelling completely before leaving. This can be done through contract retention.
Retention Includes Two Levels
- First, the hiring individual (Client) holds the money until the contract (can be construction projects) is fulfilled, and he is satisfied.
- Second, the Contractor (Employer) holds the money from his or her subcontractors.
What Is Release of Retention in Construction?
Release of Retention in Construction is another important term in any construction contract which is also an indication of completion of the scope of any construction projects up to the mentioned stages.
Usually, retention monies in construction works are released in two stages of the project.
Release of the First Half of the Retention Monies is released at the time of issuing the completion certificate.
When the completion certificate is issued first half of the retention money will first be certified and then the money will be released.
If there is any outstanding work for the construction project, those will be stated in the completion certificate.
If there is any outstanding construction work available and if the contractor does not accept to complete such defects in works or any outstanding work, a client can deduct a reasonable amount for completing such remaining work.
This reasonable cost will be the amount of money needed to cover the cost of completing the remaining construction work or defects by engaging a 3rd
Release of the Second Half of the Retention Monies will be certified and released upon the ending of defects liability period.
In most construction contracts, the defect liability period is 12 months which the contractor is liable to complete any defects arise due to bad workmanship.
Upon issuing of maintenance certificate, the 2nd half of Retention money will be released and with this complete the full release of the retention monies.
Important Things to Know Retention
- Some contractors fail to claim their release of retention money on time due to incompletion of construction work caused by the poor quality of construction.
- Final account stage is important for any construction project as the closing of the project involves much work related to cost management.
- Retention money provides protection to the employer as per the contract. However, product warranties and retention money of a project are two different things.