Flashcards
Retention Funds
Cards in this deck (4)
- 1What are retention funds?Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate, that is deducted from the amount due and retained by the client.
- 2Why are retention funds used?The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract. Half of the amount retained is released on certification of practical completion and the remainder is released upon certification of making good defects.
Interim certificates should make clear the amount of retention and a statement should also be prepared showing retention for nominated sub-contractors. - 3AdvantagesNo upfront costs – retention monies withheld and paid to contractor upon completion of work, should not incur any additional costs
Offers surety against defects – incentive for contractors to complete work to a high quality standard/remedy any defects and in a timely fashion, in order to release retention monies
Retention monies can be used by a client or main contractor, for example to fund working capital, which can reduce the need for borrowing
Retention monies can be used to offset any costs incurred in the event of contractor/subcontractor insolvency - 4DisadvantagesTakes money out of cash flow which is nonrefundable
Money is removed from cash flow which can reduce contractor/sub-contractor working capital and potentially incur further costs such as borrowing from a bank or overdraft fees
No retention money is withheld, thus it cannot be used for another purpose by the client/main contractor such as to fund working capital
Tender prices may be increased to offset the costs of the retention bond, making overall costs of construction works higher
Does not offer any protection to the contractor/sub-contractor if the client or main contractor becomes insolvent, as there is no requirement to ring-fence retention monies
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- Flashcards on Retention Funds, created by Antonia McLean on 14/04/2019.
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- Antonia McLean
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