What Is Retention in Construction?
The retention money meaning 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 that 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, or the retention amount meaning, 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. This is often referred to as retention money in contract costing.
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 in cost accounting used in construction is subjected to a limit as per the stated percentage in the contract, known as ‘Limit of Retention’. This is what is retention money in cost accounting.’.
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.
Retention Money in Construction can also be applied to nominated sub-contractors, and the main contractor can also apply retention to domestic sub-contractors.
What Is the Purpose of Retention Money?
The purpose of retention money, also known as a retention fee, is to provide protection to the employer. This clarifies what does retention mean in the context of construction.Â
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, also known as retention sum, is providing security in the form of a source of funds. This retention fee meaning is to enable the rectification of defects in construction when the contractor fails to complete the work as per the contract.
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.
FAQ: Understanding Retention Money in Construction
What is retention money in construction?
Retention money in construction is a percentage of the amount certified as due to the contractor on an interim certificate, which is withheld by the client. This sum is held back as a safeguard to ensure the contractor completes the project as per the contract terms and to rectify any defects that may arise.
Why is retention money necessary in construction projects?
Retention money is necessary to provide a fund for rectifying defects and ensuring the contractor completes the project on time and without defects. It serves as an incentive for the contractor to fulfill their obligations and protects the client from substandard work.
How much retention money is typically withheld?
In most construction projects, the retention money withheld is typically 10% of the work done until it reaches a limit of 5% of the contract sum. This percentage can vary based on the specific terms of the contract.
What is a retention bond, and how does it work?
A retention bond is an alternative to retention money. Instead of withholding a portion of the payment, the client agrees to pay the full amount due, while the contractor provides a bond that secures the amount that would have been retained. This bond offers the same security as retention money but avoids cash flow issues for the contractor.
When is retention money released?
Retention money is usually released in two stages:
- The first half upon the issuance of the completion certificate, indicating the substantial completion of the project.
- The second half at the end of the defects liability period, which is typically 12 months, upon the issuance of the maintenance certificate.
What happens if defects are found during the defects liability period?
If defects are found during the defects liability period, the contractor is required to rectify them. The retention money provides a fund that can be used to cover the costs of these repairs if the contractor fails to address the issues.
Can retention money cause financial problems for contractors?
Yes, withholding a large sum of retention money can cause cash flow problems for contractors. This is why alternatives like retention bonds are suggested, as they help alleviate the financial strain while still providing security for the client.
Is retention money applicable under the Housing Grants, Construction and Regeneration Act?
There has been a suggestion that retention money should not be applicable under the Housing Grants, Construction and Regeneration Act to prevent withholding of payment, which can cause financial issues for contractors.
How does retention money affect subcontractors?
Retention money can also be applied to subcontractors. The main contractor may withhold retention from their payments to domestic subcontractors, and the client may withhold retention from payments to nominated subcontractors.
What should contractors be aware of regarding the release of retention money?
Contractors need to ensure they complete all work to a satisfactory standard and address any defects promptly to claim the release of retention money. Delays or poor-quality work can result in retention money being withheld longer or used to cover the costs of rectifications.
