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The Mysterious Case of the Missing Retentions

I've been fortunate to work with construction Contractors, Sub Contractors and Clients. So I've seen all sides of the retention argument.

It's true. Despite clear obligations in most construction contracts, Contractors hold onto retention monies deducted from Sub Contractors. Often for months. Sometimes for ever. And Clients delay releasing retention funds to Contractors, commonly requiring reductions before paying out. Retentions can involve $ millions. Holders are vilified. Governments pledge investigations. But little changes. It's the same story, year after year, decade after decade.

Why? I've got some ideas. And maybe the baddies aren't behaving so badly after all...

Let's start from the beginning. Developers like to procure Contractors by competitive tender. Governments have little option. The lowest price wins the job. It's not uncommon for that lowest price to include a substantial error - an oversight or poor assumption, an omission or unidentified risk. From Day 1 the Contractor's slim profit margin is under threat.

Contractors procure Subcontractors by competitive tender. The lowest price wins the job. It's the same story.

As the project proceeds, changes are instructed. The Architect/Engineer calls them 'design development'. The Contractor calls them Variations and claims more money. It's not paid. Meanwhile the Subcontractor's contract requires him to make the changes. He claims more money. But, because the Contractor isn't being paid for these changes by the Developer, the Contractor doesn't pay the Subcontractor. The Contractor reminds the Subcontractor that he signed a 'pay when paid' subcontract, so it's fine to do this.

What has this got to do with retentions, I hear you ask? Well, by the end of the project, the Contractor has no cash left because the Developer still isn't paying him for those pesky changes (nor for the extra time that the Contractor needed to re-design, re-procure and install the changes). So payments to the Subcontractor are delayed, just a little at first, then a bit more.

Then the Subcontractor doesn't have enough cash. So his labour force gets reduced and, eventually, he cuts his losses and leaves the Site - with a few bits of work unfinished, and no intention of rectifying any defects that may be identified later.

To cut a long story short - the Contractor ends up having to employ other subcontractors to finish the initial Subcontractor's work, and to rectify defects in that work. The Contractor then bills the initial Subcontractor for the cost of employing the finishing-off subcontractors. Back-charges are also levied for 'site housekeeping' and other services provided by the Contractor and, when the final numbers are crunched, the Subcontractor isn't entitled to any further payment.

SO... we now understand why the Contractor can't pay the Subcontractor his retention money. The Subcontractor isn't actually entitled to any further payment. In fact, he's probably been overpaid a little by the Contractor, according to his calculations.

But the Contractor? Surely there's no good reason for the Developer to hold onto his retention money? This one can be complex. The Developer ultimately hold the purse strings. He knows this and so does the Contractor. If either one of them is looking for repeat business with the other, this can influence behaviours. If not, the Developer will have a list of items or aspects of his project that he's not completely happy with. The project may not have finished on time, and the Developer may threaten deduction of damages for delay. This is normally a big number.

Openly or otherwise, the Developer is looking for a discount from the Contractor's final account. In exchange, the issues of delay and other problems will go away. The Contractor knows this and, more often than not, plays the game.

A discount is offered, negotiated and accepted. This reduces or eliminates the Contractor's final retention payment, in exchange for a clean sheet and the promise of future work.

The End.

If you’re a Contractor, Subcontractor, Employer or Project Manager and have a question about retentions - or any other services offered by rhConsult Limited - click here to arrange a chat or a no-cost initial consultation at a time and place to suit you...

...or call Rob Hill on +852 5721 0122

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