Tuesday, September 18, 2012

How Flexible Are Construction Retention Rates?

The sum of money earned by a contractor or subcontractor that is withheld until the contract or an agreed portion is completed is called a Retention and the rate or percentage of retention is detailed in the contract between the parties. There is no however single universal rate for retentions with the rate varying depending on a number of factors.


Depending upon which country your business is operating in, the rates vary. This true of the United Kingdom, Australia and The United States.


Whilst the Governments of developing countries may leave such matters to the construction industry to sort out this is definitely not the case in the developed world and this is especially true in the liturgist United States of America. Here each State appears to have enacted its own Statue and there is definitely no consensus. The rate of Retention (also called retainage) can vary from 2% to 12% and with several rates in between.

Public versus Private Works

These statutes differentiate based upon who the work is for, so you can have for example the State of Connecticut requiring 10% for the Department of Works, 2.5% for the Department of Transportation, 5% for Municipalities, and 7.5% retention for Private works. Larger firms operating in all markets would need their construction accounting software to provide them with the flexibility to use multiple rates across different contracts and to take this into account when processing progress claims on behalf of their subcontractors.

Value of the project

Some jurisdictions take into account the value of the project so you can have Public projects in Louisiana work less than $500,000 attracting 10% retention while projects exceeding $500,000 have retentions of just 5%.

Complexity of the project

Even if the statues set retention at a certain rate for public works, in some States for example California, there may be circumstances where the client, for example a School board could be allowed to increase the retention rate based on the fact that the project was deemed to be "substantially complex".

Security Substitution

Some States allow the substitution of Securities such as bank Guarantees in lieu of retentions so in effect a zero rate applies.

Negotiated Rates

Most subcontractors are against the practice of have retentions deducted. They recognise that in theory it offers some comfort to owners by providing a form of "insurance" however it effectively means that the subcontractor is "financing the project". Hence the trend for Subcontractors to attempt to negotiate lower rates or build the retention into their bid.

Lost Retentions

When the main contractor's business fails then the subcontractor may well find that there retention monies have been lost, so it's not surprising that industry bodies such as the Australian Procurement and Construction Council, have recommended as Best Practice that the Retentions be placed in trust. Only then can subcontractors, consultants or suppliers have better than a secured creditor status in respect of these monies. Because it doesn't matter what retention rate you negotiated if there is no money left to pay you.