Do your contracts contain retention provisions and, if so, how do they operate?
In private construction contracts, it is often stipulated that the client can withhold a certain percentage of the amount due to the contractor for the execution of the works. These retention rights end with the provisional and/or final acceptance or completion of the works and constitute leverage towards the contractor, motivating him to complete the works. Note that this is not regulated by any specific default rules and that contracting parties are under no obligation to use such security mechanism.
It is market practice for specified amounts to be retained from each payment schedule up to an agreed cap, typically 5% to 10% of the contract price. Under the Oman Standard Documents half the retained amount is returned to the contractor upon the issue of the certificate of completion and the balance returned upon expiry of the defects liability period.
Unless a specific payment plan has been agreed upon, AB 92/ABT 93 states that the contractor is entitled to receive payment once a month for work performed, upon written request to the employer.
If the contractor has not performed as agreed, the employer is only obligated to pay for the work actually performed and may withhold payment for the unperformed work.
Yes, they can contain retention provisions. During the first year following the construction, the constructor is obliged to subscribe an insurance policy covering the material damaged derived from a poor execution. But according to the Law for the Regulation of Construction, he has the possibility to replace this liability insurance by allowing the promoter to retain a 5% of the cost of the construction.
In relation to this question, there is no standard form of contract governing constructions contract in Indonesia for privately funded construction contracts. As mentioned in our response to Question number (8) above the general principles of freedom of contract will apply in relation to construction contracts in Indonesia.
Notwithstanding of the above, the general principles of retention is contained in the ICC (although it is scattered in many articles in the ICC). The general principle is that certain creditors will have the retention rights to retain the object of the debtor until the invoice relating to such object has been paid.
Therefore, if the parties intend to incorporate certain retention rights, then it is recommended to expressly include this in the construction contract.
For construction contracts funded by APBN, the standard form contract issued by Ministry of PWPH contains provisions relating to retention rights. For example if the service provider does not conduct certain obligations then the project owner may use the retention funds to finance the completion of such obligations or to liquidate the bond.
Yes. Retentions are a provision that allows the Employers to retain a percentage (usually 10%) of a monthly invoice in order that the Employer can face breaches, unexpected conditions and other situations that derive of non correct performance of the contract by contractor. This retention can be used in a series of cases, that are established in the contract such as defects during the construction, lack of compliance of workers compensation, claims from sub subs, etc. In the case that the retention is not used by Employer, the Employer shall return the retention to the contractor at the time of the reception of the works.
On the public sector, it is commonly used on PPP contractual schemes where the payment to the private party is linked to the availability of the infrastructure.
As for the private sector, these clauses are mutually agreed, and they operate by retaining a certain percentage of the global value, that is paid-up subject to the culmination of the project.
Retention provisions are common when SIA norms are applicable, as they provide for 10% holdback amount on each invoice. The remaining 10% are accordingly to be paid at the end of the construction.
Retention provisions are permitted in contracts, but are less common than the provision of security by unconditional undertakings. Retention amounts are held in the same manner as third party security referred to in Section 12 above.
There is ongoing legislative concern to minimise the effect of head contractor insolvency on subcontractors. On construction projects with a value of $20 million or more in New South Wales, retention money must be held in trust by head contractors. In Queensland, construction projects valued over $1 million are required to operate a project bank account.
According to NS 8407, the contractor shall deduct 7,5 % of the progress payment basis for the employer to retain. According to NS 8405 and NS 8406, the percentage is 10 % of the invoices, but the deduction stops when the total amount reaches 5 % of the contract value.
The contractor invoices retained amount payable as part of the final account.
As stated above, the parties are free to agree the payment conditions. Retention mechanisms are commonly used. Under the dominant standard forms AB 04 and ABT 06, the default position is that the employer is entitled to retain 10% of each invoice payment, up to a maximum of 5% of the contract price. The retention fund shall be paid out when the works are approved at the final inspection and all defects (including punch list items) have been rectified.
Yes, retention money is a standard feature of construction contracts of all tiers in Hong Kong.
Retention monies are provided for in the main Government standard contracts. Clause 79(3) of the General Conditions of Contract for Building Works (1999 Ed.), the General Conditions of Contract for Civil Engineering Works (1999 Ed.) and the General Conditions of Contract for Design and Build Contracts (1999 Ed.) provides that the Employer shall pay retention money to the Contractor within 21 days from the issuance of the certificate for the payment of retention money.
The retention rate is usually 10% of each progress payment until the total retained is equal to 5% or in some cases 10% of the contract value. For example, see Clause 67.3 of the General Conditions of Contract – Building and Civil Works (Issue No. 11) and Clause 46.3 of the General Conditions of Contract – Electrical and Mechanical Works (Issue No. 4), both of which are Hong Kong Airport Authority’s standard contracts.
Retention money is used to secure the main contractor’s obligation to complete the works and make good any defects. The employer holds retention money as a trustee for the main contractor but without obligation to invest. Retention money is held until entire performance is complete. The contractor is entitled to payment on a pro-rata basis as the work proceeds, but it is not entitled to the retention money until the work is substantially complete. It is common for half of the retention money to be released on practical completion, with the remaining half released after the expiry of the defects liability period.
Yes. Construction contracts commonly provide for a proportion (usually 3% for large projects and 5% for smaller projects) of the contract sum to be withheld by the paying party until the works are practically complete. On practical completion, half of the retention is paid to the contractor, with the remaining half released at the end of the defect rectification period (subject to any deductions for defective works).
However, given the deleterious effect of this practice on the cash flow of subcontractors and suppliers, and the unfairness that can result if employers and main contractors become insolvent, the industry is pressing for retentions to be abolished, or alternatively, to be replaced with a retention bond (see question 13) or held in a separate bank account.
Most construction contracts in the United States contain retention provisions, whereby a certain percentage of the amount certified as due and owing to the contractor is deducted from the payment amount, and retained by the owner. Typical retention provisions require the release of retainage to the general contractor upon substantial completion, less the estimated cost as determined by the owner or architect to complete any “punch list items” (small items that need to be completed, but do not interfere with the owner’s use and enjoyment of the project). General contractors may also apply retention to their subcontractors in the same manner. The purpose of retention is to ensure that the contractor properly completes the requirements under the contract. The amounts retained typically range from 5-10% depending on the type of project, although many states have enacted statutes limiting the amount of retention that can be withheld.
Some contracts do contain retention provisions, which were originally set by the old Special Rules on Construction, on the Retention of the portions of the price. Unlike the regular current laws, such rules are to be applied only when and if the contractual parties do agree to apply them.
Retention is commonly used in the UAE and is generally applied at each level (i.e. the Employer retains against the Contractor and the Contractor retains against subcontractors).
The retention provisions operate by permitting the Employer to retain a percentage of the value of each amount certified for payment in a payment certificate (typically no more than 10%). The Contractor is obliged to identify this amount in an application for payment.
The retention is retained while the works are being carried out and increases as the value of the work does the same. Upon taking over, most contracts provide that half of the retention money will be certified for payment to the Contractor. Ideally the Contractor’s obligations to its subcontractors are ‘back to back’ and the obligation for it to release a subcontractor’s retention only arises once the Contractor is paid by the employer.
The remainder of the retention is usually released once the Performance Certificate has been issued. In some contracts, the Employer may require that a retention bond be provided against release of some of the retention, or in lieu of a percentage of retention being taken (i.e. 5% cash retention, and a bond from the start of the works which increases in value with each payment to the Contractor).
Retention provisions are very common in German building contracts. Usually the customer withholds 5-10 percent of the agreed contract price until the project is completed. After completion of the project the amount retained is reduced to 5 percent of the agreed contract price. The last portion of the retained amount is paid to the contractor after the warranty period expired (usually 4-5 years after completion of the project).
Parties may agree in a construction agreement that in the event of a reduction of value or if a portion of the job is cancelled, the contractor must be compensated for the disadvantage suffered which is not covered by unit prices or otherwise. However, this is only where the loss totals more than 5% of the contract price.
Contractors’ agreements usually contain retention provisions for the benefit of the project owner, who can retain the payment of a part of the price of the contractor agreement in order to guarantee that the contractor will proceed with the lifting of the snagging items after the acceptance of the works.
These retention provisions are regulated under French law: they are capped to 5% of the price of contractor agreement, and the contractor has the right to replace at any time this retention by a bank guarantee.
Given the soft character of the payment rules provided for in the GCC, the parties are free to agree that a certain amount be retained from the final or each partially payable amount, as a security for the quality of the works during the contractual and/or statutory liability period. However, as far as the public projects are concerned, Art. 72 and 302 of the Public Procurement Law provide that, as a security for the above purposes, the contracting authority may request the submission by the contractor of either a letter of guarantee or a note of deposit with the Consignment Deposits and Loans Fund.
Government construction contracts require retention of not less than 10% of the contract value until preliminary handover and confirmation of payment of taxes.
Retention sums are monies deducted from progress claims to protect the owner/employer in the event that a Contractor fails or defaults in its performance of the contract. This is in certain ways similar to other forms of security discussed in question 13 above. Apart from the Public Works Department standard form 203/A, most standard forms of contract in Malaysia provide for retention sums. The courts have held that, in the absence of a contract to the contrary, an owner/employer should maintain retention sums in a separate account on trust for the contractor.