Understanding Retentions in Construction Contracts – Infographic

Construction projects can be demanding and complex. With numerous elements and stakeholders involved, they require comprehensive and meticulous management. This makes construction projects huge undertakings that are subject to many risks.

For example, a contractor or subcontractor might abandon a project before the owner and involved parties deem it complete. This can lead to an array of problems for the developer, like project delays, dissatisfaction of shareholders, and even safety concerns.

Fortunately, companies can avoid this by establishing industry-proven practices such as using construction retention to ensure that a project is finished completely and correctly.

What is Retention in Construction?

Construction retention is withholding a portion of the payment (called retainage) until the project is finished or a milestone is achieved. It guarantees that the contractor does not leave prematurely and that the job is completed to the owner’s satisfaction.

The retainage and payment system are defined in the contract. Since construction projects typically use an instalment plan, a portion of the retainage is collected from each payment and is withheld until the end of the project. The total retainage amount is usually five to ten per cent of the entire project cost, but it can sometimes be higher depending on the agreed terms.

How to Set Up a Construction Retention?

The process of setting up retention in a construction project is as follows:

1.    Contract Negotiation

Along with other details, the developer and contractor negotiate the project’s retention terms, such as the retainage amount and payment schedule. Retention details must be clearly defined to prevent misunderstandings.

2.    Payment Retention

The retainage is held according to the contract’s terms. Typically, an amount is deducted from each instalment payment of the developer and put in a secure holding account until the project is completed.

3.    Project Completion

When the project is completed, the owner or developer inspects the contractor’s work and verifies if all contractual obligations have been met. This includes hiring property inspectors to ensure that the quality of the job is up to industry standards.

4.    Retainage Release

After passing the inspection phase, the retainage is released. In some cases, a portion of the retainage is given to the contractor when project milestones are achieved, even before the completion of the project.

5.    Finalise Transactions

At the end of the project, the developer and contractor finalise transactions to ensure that the owner has made all the payments necessary in exchange for the contractor’s service.

Advantages of Construction Retention

Retention is a standard practice in construction for its many benefits:

·       Provides Financial Security

Contractor retention provides financial security for the project owner. It becomes a buffer in case the contractor fails to complete the project or performs the job unsatisfactorily. The retainage can cover the cost of hiring new contractors to finish the project or fix any issues.

·       Promotes Timely Completion

Setting up a retention system motivates the contractor to complete or progress the project in a timely manner. It creates a financial incentive for the workers and the company whenever they reach a project milestone or finish the job.

·       Encourages Quality Work

The quality of work is upheld by ensuring that the project is accomplished to the owner’s satisfaction and the agreed terms. The retention money can be leveraged during disputes,  encouraging contractors to resolve any issues for the retainage to be released.

·       Reduces Risks

Overall, retention reduces the risks of a construction project. It serves as a safety net to ensure that the project is done to the agreed timeline and satisfaction of the owner.

Common Issues in Retention

·       It Can Cause Legal Disputes

Retention can be complex, resulting in legal disputes between project developers and contractors. Because of this, laws have been put in place to promote the welfare of the parties involved.

Depending on the country or state, retainage regulations can vary. Some laws require retention clauses to be included in construction contracts to protect owners. Others emphasise the need for prompt payments to ensure contractors are compensated correctly.

Before starting a construction project, it is essential to research regulations surrounding retainage systems. For instance, if a construction project is under strict state laws regarding timely payments, the developer must pay retention fees on time to avoid legal implications.

·       It Can Disrupt Cash Flow

A retainage can prevent a construction company from receiving full payment for the work immediately, disrupting the business’s cash flow. When the owner takes too long to release the retainage, this can hinder the construction company’s ability to pay for materials, labour, and other expenses, negatively affecting the business. Consequently, the subcontractors suffer the most as they can be paid inadequately until the retainage is released.

·       It Can Be Abused

Generally, retention favours the developer. Some retention laws specify how long a developer can keep a retainage until it is released to the contractor. This can lead some developers to hold onto the money for as long as they are allowed, even if the project has already been completed.

Although some regulations advocate for timely payments of retention fees, some laws can be abused, leading to the detriment of construction companies. This can hinder business opportunities, like being unable to take on more projects due to the lack of budget.

How Construction Software Helps Retention

Fortunately, the common struggles in retention can be alleviated with reliable construction software with retention features. This can help construction companies ensure that clients are regularly updated with retention fees by setting up an automatic alert system to remind owners when payment is due. It assists developers in complying with prompt payment laws and prevents complications that may arise from late payments.

Construction software can also aid construction companies in promoting their complete and timely compensation by providing a digital solution that streamlines the retention payment process.

Simplify Construction Retention with Bizprac

Bizprac is a complete construction management software system for builders. It has numerous automation features for construction procedures, including estimation, accounting, and retention.

Join thousands of satisfied Australian builders. Schedule a free demo today with Bizprac. Contact us through email: sales@bizprac.com or phone: 1800 009 970.

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