If you are related to construction sector, then retention money is one of the popular terms used in any construction project. The amount of retention money, Limit of Retention, Release of Retention are some of the common terms and activities involved in any construction project under this topic.
Although the amount of Retention Money can be different from contract to contract (due to the conditions of contracts used), the terms serve the same meaning to any construction project around the world.
In such, here is a brief of what is Retention Money in Construction contracts and how do you deal with it as a Contractor ,Quantity Surveyor or as a Contracts Engineer.
What is Retention Money in Construction Contracts?
Retention money is described as the sum of money held by the employer as a safeguard for any defective or non-conforming work by the contractor. This provision safeguards the employer by defects which can occur during the defects liability period if the contractor doesn’t response according to the contract terms.
Purpose of Retention Money
In general, Retention Money provides protection to the employer. Retention money gives the idea of importance of completing the signed project as per it’s terms and designs.
With such retention held, the contractor takes the responsibility to complete the construction project as per the design and quality stated in the initial contract.
How to deduct Retention Money from the progress claim?
In most of the construction contracts, the amount of Retention Money to held in each progress claim is 10% of the work done and up to 5% of the contract sum.
(However these figures can be different from contract to contract and you may need to refer the contract document for the construction project that you work for before deducting any amount.)
Here is how to deduct retention money from the progress claim.
The sum due to Interim Payment Certificate shall be calculated at the rate of 90% for the value of work done & at the rate of 80% for the properly protected materials or goods delivered on site. (Generally)
Therefore the percentage of the sum not paid is known as ‘Retention Money’ for the contract.
What is the ‘Limit of Retention Money?
Retention sum is subjected to limit as per the stated percentage in the contract which is known as ‘Limit of Retention’.
In general, ‘Limit of Retention’ is 5% of the contract sum. Therefore once the Limit of Retention is reached, Further Retention Money cannot be deducted from the next interim certificates.
Release of Retention in Construction Contracts
Release of retention is another important item or milestone in any construction contract which is also an indication of completion of the scope of the project up to the mentioned stages.
Usually, retention monies are released in 2 stages of the project.
The first half of the Retention Monies needs to be certified and released at the time of issuing the Completion Certificate. If there is any outstanding work for the project, those will be stated in the Completion Certificate. A reasonable cost will be deducted from the retention money to cover the costs of completing the remaining work by a 3rd party if the contractor doesn’t accept to complete the rejected work or any outstanding work.
The second half of Retention Monies will be certified and released upon the expiry of defects liability period. In most construction contracts, the Defects Liability period is 12 months which the contractor is liable to complete any defects arise due to the poor workmanship.
Upon issuance of Maintenance Certificate, the 2nd half of Retention Money will be released.
Above is basic concepts behind the term ‘ retention money in construction contracts’. Usually project QS or engineer who deal with progress payments know most of these details.If you find this post is helpful ,please share your thoughts.
I will share how to deduct retention money using a practical example in a future post.Wait for updates!