Retention

Question 1

What is retention?

Answer 1

It is a percentage of each interim certificate deducted and retained by the employer from each interim payment to the contractor

Question 2

What is the purpose of retention?

Answer 2

• It provides an incentive for the contractor to complete the works promptly
• It provides some financial cushion to the employer in the event of contractor default

Question 3

What items do not have retention taken on them?

Answer 3

• Loss and/or expense amounts
• Statutory fees and charges
• Some additional insurance premiums
• Opening up and testing costs
• Fluctuations Options A and B

Question 4

What is the employer’s interest in retention?

Answer 4

As a trustee for the contractor

Question 5

What should the employer do with retention money if requested by the contractor?

Answer 5

• Place it in a separate bank account
• Label the account as being held in trust
• Provide the contractor with statements showing the payments and amount of money in there
• This should ensure that the money is available to the contractor in event of employer insolvency

Question 6

Who gets the interest accruing on retention money?

Answer 6

The employer

Question 7

When is the retention released to the contractor?

Answer 7

• Half of the retention is released in the interim certificate after PC
• The remaining retention is released in the final certificate – after the Certificate of Making Good

Question 8

What is a retention bond?

Answer 8

• Provided by the contractor in lieu of taking retention from interim payments
• It should be to the same value as the retention deducted would have been
• Requirement should be stated in the contract particulars
• A standard form is provided in the JCT contract schedules

Question 9

What happens if the contractor does not maintain the retention bond?

Answer 9

• The employer can deduct retention from interim payments

- If the bond is subsequently taken out, the retention deducted must be repaid to the contractor

Question 10

What if the contract sum increases?

Answer 10

Retention can either be deducted from interim payments on the additional amount or the value of the retention bond can be increased

Question 11

Why might a retention bond be used?

Answer 11

May be used in difficult market conditions to aid the contractor’s cashflow

Question 12

What are the disadvantages of a retention bond?

Answer 12

• Employer would have to pay the premium for taking out the bond
• May reduce the contractor’s incentive to complete to standard and promptly
• Harms the employer’s cashflow
• The employer would not get the interest accruing on the amount of the retention bond