On the face of it, retentions are fair and equitable to both parties. They enable subcontractors to protect cash flow and receive timely payment for works completed, whilst allowing the main contractor to retain the financial leverage needed to ensure that any remedial work is carried out without delay.
This all sounds perfectly reasonable – assuming of course that the retentions are actually released once they become due. Sadly, it’s here that things often start to go wrong, with many subcontractors being forced to chase funds through standard debt collection, negotiation or even adjudication.
A survey conducted by the Department of Business, Energy and Industrial Strategy also found that over 40% of businesses felt that the current system increases costs and weakens working relationships. And the sad truth is that many main contractors hold on to retentions long after they are rightfully due, often never paying them at all.
So is there an alternative to this sorry state of affairs? Well, although most us are quite familiar with how standard retentions work, it seems that awareness is worryingly low about another form of retention management known as a retention bond.
Unlike regular retentions, where a main contractor holds back an agreed percentage and releases a part payment upon practical completion, with the remaining amount due 12 months later, a retention bond is a fixed percentage (often around 1.5%) paid by the subcontractor at the start of a contract.
Should any remedial work be necessary, the bondsman is responsible for funding this without any further payments due from the subcontractor. Think of it like an insurance premium which is guaranteed to pay out on your behalf should anything go wrong.
The obvious question is why would anyone pay a guaranteed percentage of the job to a bondsman when, in theory, 100% of the project funds will be paid once the retentions fall due? Well, the key is in the word “theory”. Almost all subcontractors have lost their retentions at some stage and for many it is a regular occurrence. So the question is actually whether to pay a guaranteed amount up front, or risk a much larger loss at the end.
In reality, there is no right or wrong answer. It’s a question of balancing the risk and going into each contract making a conscious decision, given the size of the project and previous experience of the client, whether a standard retention, or a retention bond, is likely to result in the greatest profitability.
Additionally, it is vital that subcontractors consistently challenge the unethical behaviour of main contractors in withholding retentions without due cause. Failing to do so not only reduces the profitability of the project in question, but it sets a precedent for future jobs which, if allowed to continue, can significantly impact the profitability and stability of your business as a whole.
In summary, avoid falling into the trap of simply accepting the status quo. Assess the risk and decide which option is right for your business. If this means a standard retention, act promptly as soon as monies fall due and, if necessary, seek professional assistance to ensure full and timely payment.