The Purpose of Retentions
Retention monies are a means of providing a security for the completion of the contract and the amending of defects, as defined in the Building Contract Dictionary as “a safeguard against defects or non-performance”. It is not a device for trading with contractors’ and sub-contractors’ money.
Retention as a concept is long-established, but such withholding of money against anticipated problems is commercially questionable.
The Percentage Paid/Retained
Most standard forms of contract provide for a retention percentage to be deducted, usually 5%. It is important for all sub-contractors to know what the main contract retention is – and to ensure that no greater percentage applies to the sub-contract.
Release of Retention – what has changed?
All standard forms provide for the release of retention in two instalments. Each instalment should be equal, so that the first half of the retention money is released on practical completion of your work, and the second half should be released on the expiry of the defects liability period under your contract. However, in most standard form of sub-contracts, entered into before 1 October 2011 the second half of the retention was triggered once the certificate of making good defects had been given under the main contract.
Establishing the release dates can be problematical. The first half should be released on practical completion. Practical completion is ultimately a matter for the judgement of the contractor. There is no judicial definition of practical completion, and arguments can arise.
It is generally taken to mean that the works have been completed to the extent that nothing important or significant will prevent their use for their intended purposes. In other words, they are capable of being taken over and used by the building owner. Establishing practical completion and obtaining release of the first half of retention can be extremely difficult with a finicky customer.
The changes to the Construction Act alter the position in which the second half of the retention can be released and ensure that any construction contract entered into after 1 October 2011 can no longer link the release of retention to an act or event occurring under an upstream contract. This means that retention must be triggered for release by an act or event occurring under that contract, for example the expiry of defects liability period in the sub-contract.
Any contracts entered into after 1 October 2011 that continue to link the release of retention to an upstream contract will not be compliant with the Construction Act and the Scheme for Construction Contracts will supplement the contract with regard to the release of retention.
JCT have had to make significant changes to how retention is now dealt with as a result of the changes to the Construction Act. Under the JCT Sub-Contracts the first half of the retention is triggered by practical completion of the Sub-Contract Works. The second half of retention is now triggered for release on the “Retention Release Date” which is specified in the Sub-Contract Particulars. The second half of the retention will be paid to the Sub-Contractor on the next interim payment date, provided there are no defects in the Sub-Contract Works at the Retention Release Date.
The term “Minimum Retention Amount” is now incorporated in the JCT sub-contracts which means the amount to be agreed by the parties and specified in the Sub-Contract Particulars. If the total amount of retention that would be deducted is less than the sum stated in the Minimum Retention Amount then no retention can be deducted. If the balance being held falls below the specified Minimum Retention Amount, once the first half of the retention has been paid, the balance of retention must also be released to the Sub-Contractor. The default amount is £250 if an amount is not specified in the Sub-Contract Particulars.
Whilst the JCT has made changes in respect of retention to comply with the changes made to the Construction Act, it’s arguable whether these changes will benefit sub-contractors as contractors are still free to specify a Retention Release Date where they could potentially specify a date so far in the future so as to guarantee that the contractor will not have to release retention to the sub-contractor under the sub-contract until retention has been released under the Main Contract.
For further information on Construction Law and to find out how we can help you, please contact our Construction Law Team on 01279 755777 or get in touch with Charlotte Barker, Solicitor in our Construction Law Team.