If you work related to construction sector, then you know that retention money is one of the popular terms used in any construction project. However, do you know what is retention money in construction contracts? And do you know how to deduct it in progress payments?
For most quantity surveyors and contract engineers; deducting retention money is not any difficult task. They understand it clearly. However with experience working with contractors, I have found that some contractors do not understand the entire purpose of retention money in their projects. Even there are times that subcontractors do not submit their final claim to request the release of retention money.
While these are common issues found in construction project payments, some contractors do not clearly understand the reason why their payment is less than their actual progress claim.
Having worked in such different situations and having experience with solving issues arise related to retention money payment and deductions, in this article I want to share most of the theories and industry practices related with retention money.
Popular terms related to Retention Money
Before discussing further, it is important to understand the different terms used related to retention money. All these terms doesn’t mean the amount of retention to be deducted. Each term has its own definition.
What are the terms used in related to retention money? Let’s discuss!
The amount of retention money, limit of retention, release of retention are some of the common terms and activities involved in any construction project under this topic. Release of retention involves 2 different stages. That is First release of retention and 2nd release of retention.
However there are times which we find that these terms or the actual purpose of retention money are misunderstood.
Although the amount of Retention Money can be different from contract to contract (due to the conditions of contracts used), the terms serve the same meaning to any construction project around the world.
In such, here is a brief of what is Retention Money in Construction contracts and how do you deal with it as a Contractor ,Quantity Surveyor or as a Contracts Engineer.
Warning: before reading further, you understand that these are guidelines only. You have to refer your actual conditions of contract to understand the specific percentages and clauses related to retention money.
What is Retention Money in Construction Contracts?
Retention money is described as the sum of money held by the employer as a safeguard for any defective or non-conforming work by the contractor. This provision safeguards the employer by defects which can occur during the defects liability period if the contractor doesn’t response according to the contract terms.
Purpose of Retention Money
In general, Retention Money provides protection to the employer. Retention money gives the idea of importance of completing the signed project as per it’s terms and designs. Contractor has to complete the scope of work under his contract in order to receive the retention money amount withheld.
This is how employer is protected against the money he pays in monthly progress claims.
With such retention held, the contractor takes the responsibility to complete the construction project as per the design and quality stated in the initial contract.
How to deduct Retention Money from the progress claim?
In most of the construction contracts, the amount of Retention Money to hold in each progress claim is 10% of the work done and up to 5% of the contract sum.
However these figures can be different from contract to contract. Therefore you may need to refer the contract document for the construction project that you work before deducting any amount.
Here is how to deduct retention money from the progress claim.
The sum due to Interim Payment Certificate shall be calculated at the rate of 90% for the value of work done & at the rate of 80% for the properly protected materials or goods delivered on site. (Generally)
Therefore the percentage of the sum not paid is known as ‘Retention Money’ for the contract.
What is the ‘Limit of Retention Money?
Retention sum is subjected to limit as per the stated percentage in the contract which is known as ‘Limit of Retention’.
In general, ‘Limit of Retention’ is 5% of the contract sum. Therefore once the Limit of Retention is reached, you cannot deduct further Retention Money. In the subsequent interim certificates, you can see the total retention money deducted. However there will not have further deductions.
Release of Retention in Construction Contracts
Release of retention is another important term or milestone in any construction contract which is also an indication of completion of the scope of the project up to the mentioned stages.
Usually, retention monies are released in 2 stages of the project.
1. Release of the first half of the Retention Monies
at the time of issuing the Completion Certificate, The first half of the Retention Monies will be certified and released
If there is any outstanding work for the project, those will be stated in the Completion Certificate.
If there are outstanding work available and if the contractor doesn’t accept to complete such rejected work or any outstanding work, QS can deduct a reasonable amount for completing such remaining work.
This reasonable cost will be the amount of money to cover the costs of completing the remaining work by engaging a 3rd party.
2. Release of the second half of the Retention Monies
The second half of Retention Monies will be certified and released upon the expiry of defects liability period. In most construction contracts, the Defects Liability period is 12 months which the contractor is liable to complete any defects arise due to the poor workmanship.
Upon issuance of Maintenance Certificate, the 2nd half of Retention Money will be released.
Important things to know
As a contractor or QS in charge for a project, below are the mistakes and misconceptions to note.
- Some contractors fail to claim their release of retention money on time.
- Final Account stage is important for any projects as closing of the project involves many activities related to cost management.
- Retention money provides protection to the employer. However product warranties and retention money are two different things.
Above are the basic concepts behind the term ‘retention money in construction contracts’. Usually project QS or engineer who deals with the progress payments know most of these details.
If you find this post is helpful, please share your thoughts.Also read this post about variations in construction contracts.
- Construction Contract Administration – The Basics
- What are Omissions in Construction Contracts
- Variation Claim Submission Guide for Contractors
- What are Liquidated Damages in Construction Contracts
- Impact of COVID-19 Virus on Construction Projects
Thanks mam! This article clearly explains all the necessary things to know regarding retention money.Sometimes Contractors misunderstand these deductions in their claim.
Glad you like the article..
Madam can we accept bank guarantee for the second half valid till completion of defect liabily period and pay the cash to the contractors. This arrangement was not there in terms of contract.
Still can we accept the BG and release cash
You May release the money against “Unconditional Bank Guarantee”. This means that the Bank will pay that sum on its presentation irrespective of any objections from the Contractor.
After the completion of liability period with in 14 days can employer hold the retention money denoting defects ( defects informed in after final liability date)
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I do believe all of the concepts you’ve presented in your post. They are very convincing and will definitely work. Still, the posts are too quick for novices. May you please prolong them a bit from subsequent time? Thank you for the post.
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Thanks Kiran. I am glad that this article is helpful.
Thank you so much for a refresher on this item. I have recently come across something new for me regarding retention. The Contractor has requested my Client to consider a Retention Guarantee as they, C0ntractor requires
money immediately to improve their cashflow. Could you kindly explain the Pros and cons of this arrangement .
Thanks for your query.Sorry i saw the comment just now.I will share the details in a new article.
As per the BOQ quantity of the one item is 10 m only .but in the tender drawing actual quantity of this item is 65m . but the problem is this item is now descoped/omitted from the contract. so how to submit this cost variation to client , which quantity we need to consider 10m or 65m.
Hi Azhar,This is how I understand your issue.However it is necessary to read the contract properly.
If the item is omitted from the contract,first consider the omission.After that,now there is no such item for this contract.(Therefore no issue with whether it is 10m or 65m)
Hope you have written instructions in order for this omission.
After the omission,it seems this item has been carried out as a VO.
Therefore it is a new item for the contract and consider the actual quantity for the variation submission.(The quantity actually carried out at site)
for VO work, is there any retention? (the VO is issued in another contract / PO, separately from the original contract / PO)
If VO is issued as another contract,you have to consider the clauses under that contract. and,if it is a separate contract,it should have retention clause too as in a new contract.
Can a Employer release the retention sum of an NSC to the NSC of a Main Contractor who has gone into liquidation? The Employer has employed another contractor and using the same NSC to complete the balance of works.
I do understand the process but didn’t know proper English terms related to it, so thank you for this compendium of knowledge.