Do your contracts contain retention provisions and, if so, how do they operate?
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.