How to get streetwise about retention
Barry Ashmore explains what you can do as a subcontractor to avoid losing your retentions
IF you carry out commercial work as a subcontractor to a main contractor you’ll be familiar with the concept of retention – the proportion of money (usually 3-5%) that is held back until the end of the defects liability period.
You may be just as familiar with the battle to try and get it back, and even give up on it altogether in frustration! Do you make it a priority?
Smarter flooring contractors make sure they do what needs to be done to get all their retention money back, because it increases their profit margin!
SUBHEAD: How do they do it?
First, let’s clarify a few things about how retention is supposed to work, and what your legal rights are.
Various terms are used to describe the completion of works and a common one is ‘practical completion’ or PC. At this stage, a certain proportion (usually half) of retention should be paid back to you the sub-contractor. This figure is known as the first moiety of retention.
After PC, there is a set period of time, typically 12 months, usually known as the ‘defects liability period’. At the end of the defects liability period, the works are inspected again and if everything is to satisfaction, the client issues a document called ‘certificate of making good defects’.
At this stage, the second moiety of retention is normally due to be paid out to the main contractor, and in turn he should pay this to all his subcontractors.
Before the Construction Act 2011 came into force, it was possible for main contractor to link the paying back of your retention to an event in the main contract i.e. the issue of that making good defects certificate.
This meant that if the event didn’t occur, your retention wasn’t released and events (fictitious or otherwise) that were nothing to do with you, but were nonetheless holding up the release of your retention.
Since 1 October 2011 the Construction Act has prohibited payments to you being triggered by an event under another contract. What this means is that the terms of release of retention back to you must be dealt with in your contract, and not linked to an event in the main contract.
Most sub-contractors don’t put a high priority on the collection of retention money. Even when, in the case of one of our clients, it had accumulated to over £3.5 million pounds!
It is easy to see how this happens. Most of the time, you are looking at the jobs you are working on at the moment, and making sure you maintain cash-flow in the here and now. The issue of a small percentage of a contract from last year becomes less important as time goes on.
However, these small percentages can add up to many tens or hundreds of thousands of pounds.
Firstly, it is essential to keep good records and copies of any correspondence your team sends. This can be very useful in reminding the contractor just how often you have asked him for the money!
If the first moiety of retention is not released when requested, your system should flag this up and the account should be singled out for special attention.
Check carefully what the contract says. If you have achieved the necessary stage that triggers the release of the first moiety, the contractor is in breach of contract if he does not release it. This may sound very formal but, hey, it’s your money he is holding onto. So, remind him politely of this fact and cut through the administrative layers and speak to a decision-maker.
If the contractor does not release the first half of retention when you have put pressure on him, you should take the matter extremely seriously. It may be a sign that he is in financial difficulties and urgent action may be required. At this stage, you may need to seek professional advice so please feel free to give us a call.
Assuming that you do collect the first moiety of retention without too much trouble, your system then needs to monitor and control the second moiety. Your system should record the date of practical completion and the date in the contract that the second release is due.
If you’re not sure, then that is again something you may wish to take advice about. Assuming you know and have reached the date and have remedied any defects that have appeared in your works, you are entitled to be paid the second moiety of retention. It’s that simple.
So, once again remind the contractor politely of the fact that the money is due and once again cut through the administrative layers and speak to a decision-maker. If the money isn’t forthcoming you should again take the matter extremely seriously and seek professional advice.
The key is not to leave it to your accounts department who will be speaking to the contractor’s accounts department, which in turn will be churning out their standard BS about why they can’t pay!
The length of time the contractor can hang on to and utilise your money to run his business, will depend upon your ability to chase him. Some flooring contractors will not be very good at chasing their retention money and some may even write it off altogether. The contractor simply takes advantage of your generosity.
Don’t let them get away with it. It's your money and you are entitled to collect it when it's due.
At StreetwiseSubbie, we have a team of expert construction consultants who have more than 28 years’ experience in dealing with the sorts of issues you face, especially the collection of retention. So, if you need a helping hand or more information, please contact us.
Barry is MD and co-founder of StreetwiseSubbie.com which provides business solutions for Specialist Contractors throughout the UK