RETENTION
Although the subcontractors have to continue trading without benefit of their money there is little they can do about it due to the wording of their contract, which requires the issue of the CMG to trigger the retention release. So how long can this unassailable situation last? Regretfully, the sums withheld are often too small for it to be commercially viable to launch a legal assault which may not produce the desired results anyway. However, the main contractor has an implied obligation to do all that is reasonably necessary to obtain the CMG within a reasonable time after the end of the Rectification Period.
REASONABLE DOUBT
The word ‘reasonable’ is the snag; many expensive hours have been spent in court establishing what is meant by ‘reasonable’ in particular situations. There is no standard to rely on, parties generally take action when they become frustrated by the inertia of the other side, and it also depends on individual circumstances. John McGuiness in ‘The Law and Management of Building Subcontracts’ suggests that around four months from the end of the Rectification Period would likely be considered reasonable or at least not an excessive period (by the court). But still there is nothing definite. Another approach to aid recovery of
Contractors can budget for retention provided that they are aware of the conditions when tendering.
trades have been rectified. This has the effect of delaying the release of retention to subcontractors including those whose work is defect free and those who have made the effort to rectify their defects timely. It is particularly damaging to subcontractors whose work is completed early in the programme who wait for most of the contract and rectification periods to receive their retention.
DISPUTE
Often a dispute will arise between the employer and contractor over the contractor’s obligations to rectify a particular defect. The contractor stating his case for not dealing with the disputed defect and the employer demanding it to be rectified before he will allow the issue of the CMG. In these circumstances the issue of the CMG is delayed and hence the release of retention to the contractor and all of his subcontractors, including those who have dealt timely with the defects in their work.
retention before the issue of the CMG would be to prove that the main contractor had prevented the issue of the certificate. In practice it would be difficult for a subcontractor to obtain evidence to prove that the contractor’s actions amounted to prevention. Should an unreasonable amount of time pass it would appear more likely that the main contractor was preventing the issue of the certificate and therefore in breach of contract. Due to these difficulties main contractors and employers are fairly free to hold onto retention monies for no contractual reason, but merely to boost their cash flow or profit. To combat this abuse a system of regular ‘chasing’ is required and in addition and after a ‘reasonable’ time has passed from the end of the Rectification Period it would be advisable to submit a claim for financing the retention fund, updated and submitted on a monthly basis. This demonstrates to the payee that his potential costs are increasing and would be a useful record to hold in the event of subsequent legal action.
Retention is frequently lost by subcontractors due to upstream insolvency, whereby the contractor includes a term in the subcontract removing his obligation to pay in the event that the employer becomes insolvent and does not pay him. This practice was condoned by the ‘Construction Act’ and has not been amended by the new legislation (LDED & C Act 2009). It is difficult to see the logic in these provisions which apply to any money owed, including retention. In practice retention funds are
indistinguishable from an employer’s or contractor’s working capital although purpor ted to be held in trust. So in the event of their insolvency the retention is not treated by a liquidator in a different manner to other assets and is distributed to creditors without regard to the true owner.
PROCEDURES
There are a number of procedures available to protect the employer without the need for retention. However, they are voluntary options and therefore often avoided by parties wishing to abuse the use of retention.
RETENTION BOND
An alternative is for contractors to provide a bond in a similar sum to the retention fund that would otherwise be held. Provision is made to reduce the bond by 50 per cent on practical completion. It can be called by the employer in the event that defects are not dealt with. Cost of the bond is born by the contractor/subcontractors who have the opportunity to provide for the cost in their tenders. This facility therefore can have the effect of increasing tenders by the bond costs of contractor and subcontractors and deprives the employer of the use of the retention fund. Many contracts now provide a choice of retention or a retention bond.
STAGE/MILESTONE PAYMENTS
Stage payments are sums of money which relate to stages of the works, i.e. foundations, external walls, internal partitions, first fix electrical etc, and are paid on completion of that stage. Milestone payments operate on a similar
basis being paid at set points or dates throughout construction. This method has certain advantages. Cash flow is more predictable for contractors and subcontractors and employers have a more accurate view of expenditure when forecasting drawdown from their funders. However, the fluid design of construction projects gives rise to variations and such expenditure is often unpredictable and when paid on an interim basis throws out the accuracy of these arrangements. Unlike valued interim payments milestone/stage payments may not relate accurately to work done, this can have the effect on contractors of under payment thereby affecting cash flow. There is a tendency for the final stage to be a large proportion of the contract value thereby emulating retention. There may also be instances where a payment for a whole stage is delayed due to the non-completion of a minor item, a situation that would not arise on a traditional valued contract.
TRUST FUNDS
Most standard forms of main contract have provision for retention to be held by the employer in trust and in a separate bank account. However, this is not automatic and requires the agreement of both the employer and contractor and is therefore seldom used. If the provision of trust funds for
retention were mandatory and also extended to subcontracts, retention would be protected from misuse and the effects of upstream insolvency. Interest on the fund could be credited and repaid along with the retention to the owner. A simple solution, which has enormous advantages, however, with retention funds, ring-fenced, employers and contractors would be unable to make use of the money which could have an effect on construction costs but would be a more even handed solution.
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For almost 10 years Ken has advised ECA members on commercial and contractual problems including guidance on adjudication and mediation. He is a Chartered Surveyor (MRICS) and Chartered Builder (MCIOB) with extensive experience in the construction industry as a quantity surveyor with building & civil engineering contractors and consultants in the UK and overseas.
He has specialised in the compilation and agreement of contractual claims in building and civil engineering on a variety of projects and dealt extensively with contractual disputes, some settled by arbitration, litigation and mediation. Ken is a Chartered Institute of Arbitrators Accredited Mediator (MCIArb) and has been involved in the mediated settlement of disputes between ECA members and their clients.
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