Practical Law

Retentions seem to have been around since time immemorial. For their supporters, they are easy to administer and represent a sensible lever over contractors and sub-contractors, encouraging them to fix defects (or providing a fund to pay for the fix if they can’t or won’t remedy a defect themselves). However, the opponents of retentions are increasingly vocal. So, why might you do without a retention and what’s the easiest way to do so?

What is a retention?

A retention is a right for an employer (under a main contract) or a contractor (under a sub-contract) to keep a percentage of the contract price until completion or making good of defects (rectification).

For example, under the JCT Design and Build Contract, 2005 edition, Revision 2 2009 (DB05), the employer may (in summary) retain 3% of each interim payment to the contractor until practical completion. At practical completion, the employer must pay the contractor half of the retention. (In effect, the 3% retention becomes a 1.5% retention.) The employer must release the rest of the retention at completion of making good (of defects).

If the contractor doesn’t remedy a defect, the employer may (in effect) use the retention to remedy the defect itself (subject to complying with the building contract).

Why might an employer live without a retention?

Why might an employer agree to forgo a cash retention in a main contract, if a retention encourages the contractor to sort out any problems on a project?

Part of the answer lies in the common practice of failing to pay retentions back. While everyone in the industry can point to projects where there is no unpaid retention, projects with unpaid (or overdue) retentions are common and may even outnumber those where everything has been paid as the contract demands.

If a main contractor expects a long delay in returning its retention or, worse, the retention fund being swallowed up and never returned, it will need to price that risk into its tender.

This is perhaps the simplest and most cogent argument against retentions: that cash-flows, payments, profits and contracts are simpler and more transparent without a retention.

Why might a main contractor live without sub-contractor retentions?

If an employer decides not to use a cash retention, then (arguably) a main contractor may be able to follow suit with its sub-contractors.

In fact, those rejecting retentions have more than one string to their bow.  Those arguing against routine use of retentions are often careful to limit their arguments to cash retentions. Groups such as the National Specialist Contractors Council (NSCC), which promotes a no retentions policy for sub-contractors, do not shy away from promoting a retention bond as an alternative.

So, the argument goes, you do not need a cash retention or a pot of money in a bank account to hold sway over a sub-contractor. You can rely on your business relationship with many sub-contractors and (if that fails) you call on a retention bond instead.

The obvious drawback for a contractor is that making a deduction from a retention pot is a clear contractual remedy that does not involve courts or third parties, whereas making a call on a retention bond sounds like a bigger step that must necessarily involve a third party (the bondsman or surety).

Using a JCT contract without a retention

Using the JCT DB05 (and other contracts in the JCT suite) without a retention is simple, if you want to use a retention bond instead.

Sticking to the DB05 example, complete the JCT contract particulars to state:

• That a retention bond is required (the entry relates to clause 4.17).
• The required maximum aggregate liability of the surety.
• A calendar date as a long-stop date when the bond will expire (even if there is no statement of making good).

The form of bond is in part 3 of schedule 6.

Using an NEC contract without a retention

Using an NEC3 Engineering and Construction Contract (ECC) without a retention is, on the face of it, even easier.

The ECC only requires a cash retention if the parties agree to use Option X16. If they do, then the percentage to be held is determined by the employer, who states this at time of tender. Half of the retention held is released on completion of the whole of the works and the remainder on the defects date. This is similar to most standard form contracts, such as the DB05.

Do retentions have a future?

Cash retentions are clearly under fire. Retention bonds are one response to that trend. Perhaps in future, where retentions are used, fewer will be cash retentions.