RetentionRICS Professional Guidance, UK

1st edition, guidance note

Retention1st edition, guidance note

This guidance note introduces the subject by looking at the generalprinciples of retention, including areas such as law; reasons forintroduction within a contract; levels of retention, and how amountsare deducted, certified or released.

It then focuses on how the standard forms of contract deal with theissue. A list of the contracts reviewed is included within the table ofcontents. This paper reviews methods and limits of deduction,inclusion of the retention amount to be included within the contract,release and set off against sums held.

The guidance note concludes with a review of common issuesincluding areas such as commonly occurring problems; financing;insolvency, and defects rectification.

Guidance is given for each of the main groups of contracts andthe forms in most regular use within those groups, under thefollowing headings, which map to the Assessment of ProfessionalCompetence (APC):

• General Principles (Level 1 – Knowing)• Practical Application (Level 2 – Doing)• Practical Considerations (Level 3 – Doing/Advising)

rics.org/standards rics.org/standards

GN 90/2012RICS QS & Construction StandardsRICS QS & Construction Standards (the ‘Black Book’)

RetentionRICS guidance note

1st edition (GN 90/2012)

Acknowledgment

Cover image © iStockphoto.com/Speeding train (image no. 10662390)

Published by the Royal Institution of Chartered Surveyors (RICS)

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No responsibility for loss or damage caused to any person acting or refraining from action as a result of the material included in this publication canbe accepted by the authors or RICS.

Produced by the QS & Construction Professional Group of the Royal Institution of Chartered Surveyors.

ISBN 978 1 84219 770 7

© Royal Institution of Chartered Surveyors (RICS) March 2012. Copyright in all or part of this publication rests with RICS. No part of this work maybe reproduced or used in any form or by any means including graphic, electronic, or mechanical, including photocopying, recording, taping or Webdistribution, without the written permission of the Royal Institution of Chartered Surveyors or in line with the rules of an existing license.

Typeset in Great Britain by Columns Design XML Ltd, Reading, BerksPrinted by Page Bros, Norwich

Contents

RICS guidance notes 1

1 Introduction 2

2 General principles (Level 1 – Knowing) 3

2.1 Reason for inclusion of retentions within the contract 32.2 Amounts of retention and caps 32.3 General principles of release of retentions 32.4 Alternatives, e.g. retention bonds 4

3 Practical application (Level 2 – Doing) 5

3.1 Contract specific clauses for retention 103.1.1 JCT contracts 103.1.2 NEC Engineering and Construction Contract 143.1.3 FIDIC Red Book and Orange Book 163.1.4 Common contract features 18

4 Practical considerations (Level 3 – Doing/Advising) 19

4.1 Common issues 194.1.1 Problems with release 194.1.2 Financing/insolvency 194.1.3 Latent defects 19

RETENTION | iii

Acknowledgements

RICS would like to thank the following for theircontributions to this guidance note:

Lead author

Graham Seage FRICS (Mace Limited)

Working Group

Chair: Andrew Smith (Laing O’Rourke)Alpesh Patel (APC Coach Ltd)Christopher Green (Capita Symonds Ltd)David Cohen (Amicus Development Solutions)Duncan Cartlidge (Duncan Cartlidge Associates)Jim Molloy (Department of Health, Social Services

and Public Safety, NI)John G Campbell (BAM Construction Limited)Kevin Whitehead (McBains Cooper Consulting

Limited)Michael T O’Connor (Carillion Construction Limited)Michelle Murray (Turner & Townsend plc)Roy Morledge (Nottingham Trent University)Stuart Earl (Gleeds Cost Management Limited)

iv | RETENTION

RICS guidance notes

This is a guidance note. Whererecommendations are made for specificprofessional tasks, these are intended torepresent ‘best practice’, i.e. recommendationswhich in the opinion of RICS meet a highstandard of professional competence.

Although members are not required to follow therecommendations contained in the note, theyshould take into account the following points.

When an allegation of professional negligence ismade against a surveyor, a court or tribunal maytake account of the contents of any relevantguidance notes published by RICS in decidingwhether or not the member had acted withreasonable competence.

In the opinion of RICS, a member conforming tothe practices recommended in this note shouldhave at least a partial defence to an allegation ofnegligence if they have followed those practices.However, members have the responsibility ofdeciding when it is inappropriate to follow theguidance.

It is for each surveyor to decide on the appropriateprocedure to follow in any professional task.However, where members do not comply with thepractice recommended in this note, they should doso only for a good reason. In the event of a legaldispute, a court or tribunal may require them toexplain why they decided not to adopt therecommended practice. Also, if members have notfollowed this guidance, and their actions arequestioned in an RICS disciplinary case, they willbe asked to explain the actions they did take andthis may be taken into account by the Panel.

In addition, guidance notes are relevant toprofessional competence in that each membershould be up to date and should have knowledgeof guidance notes within a reasonable time of theircoming into effect.

Document status defined

RICS produces a range of standards products.These have been defined in the table below. Thisdocument is a guidance note.

Type of document Definition StatusRICS practice statement Document that provides members with

mandatory requirements under Rule 4 of theRules of Conduct for members

Mandatory

RICS code of practice Standard approved by RICS, and endorsed byanother professional body that provides userswith recommendations for accepted goodpractice as followed by conscientiouspractitioners

Mandatory orrecommended goodpractice (will be confirmedin the document itself)

RICS guidance note Document that provides users withrecommendations for accepted good practiceas followed by competent and conscientiouspractitioners

Recommended goodpractice

RICS information paper Practice based information that provides userswith the latest information and/or research

Information and/orexplanatory commentary

RETENTION | 1

1 Introduction

This guidance note introduces the subject bylooking at the general principles of retention,including areas such as law; reasons forintroduction within a contract; levels of retention,and how amounts are deducted, certified orreleased.

The guidance note then focuses on how thestandard forms of contract deal with the issue. Alist of the contracts reviewed is included within thetable of contents. This paper reviews methods andlimits of deduction, inclusion of the retentionamount to be included within the contract, releaseand set off against sums held.

This guidance note concludes with a review ofcommon issues including areas such as commonlyoccurring problems; financing; insolvency, anddefects rectification.

Guidance is given for each of the main groups ofcontracts and the forms in most regular use withinthose groups, under the following headings, whichmap to the Assessment of ProfessionalCompetence (APC):

+ General principles (Level 1 – Knowing)

+ Practical application (Level 2 – Doing)

+ Practical considerations (Level 3 – Doing/Advising)

2 | RETENTION

2 General principles (Level 1 – Knowing)

2.1 Reason for inclusion of retentionswithin the contract

Retention is a sum, generally deducted at eachmonthly payment notice, to provide the client withsome security that the contractor/sub-contractorwill return to correct any defects during the defectscorrection period, or defects liability period. If thecontractor/sub-contractor does not return tocorrect the defects then the retention held may beused to fund the payment of others to correct thedefects. It is advisable to check the contract on theability to do this, and the relevant notices thatshould be given to the incumbent contractor priorto appointing others to undertake the works.

2.2 Amounts of retention and caps

The level of retention held is usually a percentageof the value of the contract works. It is generallyapplied to the value of the contract works,including variations and changes, not just to thecontract sum. Sometimes contracts will place a capon the maximum level of retention that can bededucted. For example, this could be three percent of the contract price/lump sum.

Other limits or caps may be set as to the maximumamount of retention that may be deducted frompayments. The FIDIC and NEC forms of contractdemonstrate this and this is detailed further withinthis guidance note.

Some contracts also contain retention free amountsand therefore the contractor can be paid up to acertain sum prior to the retention being deducted.

Retention bonds are an alternative and these areconsidered elsewhere within this guidance note.

2.3 General principles of release ofretentions

Generally, a portion of the retention is releasedupon completion of the works. The remainder isreleased when the rectification period or defects

liability period has expired and the relevantcertification under the contract has been issued toconfirm this. It is advisable to check the details ofthe individual contracts as release is slightlydifferent in each. The release of retention isdifferent if there is sectional completion, partialpossession or the like under the contract. Themajority of contracts allow for partial release of theretention at each sectional completion but the finalrelease will vary between contracts. The finalportion may be released either at the expiry of thedefects liability period for each section or the expiryof the defects liability period for the works as awhole. The majority of contracts also allow forpartial release of retention upon partial possessionby the client/employer.

Sub-contractors should review contracts todetermine when the release is triggered. This maybe by completion of the sub-contractor’s works orthe main contractor’s works. However, contractsentered into on or after 1 October 2011 will besubject to the Local Democracy, EconomicDevelopment and Construction (LDEDC) Act 2009.This has provisions which forbid payments under acontract being dependent on performance underanother, so the payment of subcontract retentionscannot be linked to, e.g. practical completion of themain contract.

The contract should be reviewed for the effectupon retention in the event that the contract isterminated. Generally, clauses regarding the releaseof retention cease to apply in the event oftermination but this may vary dependent on thereason for termination and the conditions ofcontract.

For quantity surveyors or project managers runningmultiple contracts or programmes of work, it isadvisable to set up a tracking process of retentionfor clients and contractors/sub-contractors. Thismay avoid late release of retention or a surprisepayment required by a client/employer. It should benoted that simple interest will become due for thelate release of retention monies, once contractualprerequisites have been completed.

RETENTION | 3

2.4 Alternatives, e.g. retention bonds

Rather than deduct a physical sum from acontractor’s interim payment, it is possible toprocure a retention bond to cover retention thatwould otherwise have been deducted. There areexamples of suitable retention bonds in thecontracts reviewed within this guidance note.Retention bonds are generally issued in favour ofthe client/employer who has waived his rights,under the contract, to the deduction of cashretention amounts. Bonds are generally set to thestandard levels of retention which would otherwisebe contained in the contract.

The contracts reviewed in this guidance notecontain retention bonds appropriate to use with thesame form of contract. For an example, refer to theretention guarantee which is contained within theappendices of the FIDIC Red Book conditions. Thisis simply a bank guarantee to pay the beneficiary(generally the client/employer), up to a limit of theguaranteed amount if the contractor (referred to asthe Principal), ‘has failed to carry out hisobligation(s) to rectify certain defect(s) for which heis responsible under the contract’. An example isalso included in the JCT Standard BuildingContract.

It is recognised that there is opposition fromcontractors and sub-contractors to the use ofretention in many areas as there is a view that thisimpacts upon cash flow. There has been movementfrom clients and employers, particularly in thepublic sector, to support this. The removal ofretention provisions without the use of anappropriate bond is not a decision to be takenlightly and should be thoroughly reviewed with theclient/employer with a clear explanation of the risksprior to pursuing this route.

4 | RETENTION

3 Practical application (Level 2 – Doing)

3.1 Contract specific clauses forretention

This section contains the detail of the retentionprovisions within each of the contracts, but forease of reference, this has also been summarisedin the following table. Practitioners are stronglyadvised to always review the precise wording of thecontract, especially where older or later versions ofthe contract may be in use and clients/employersoften amend the wording of the standard forms ofcontract.

RETENTION | 5

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6 | RETENTION

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RETENTION | 7

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8 | RETENTION

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RETENTION | 9

3.1.1 JCT contracts

General

The Standard Building Contract is reviewed indetail. Other versions of the JCT contracts havebeen reviewed and brief comments are also noted.It is important to check the particular wording in acontract, especially when older or amendedversions of the contract are being used.

The Standard Building Contract Without Quantitieshas been used in the preparation of this guidancenote.

Standard Building Contract

Details of the retention requirements are to becompleted in the contract particulars. The contracthas the facility to enter the requirement for aretention bond and the contract particulars shouldbe amended to indicate whether this is applicableto the particular contract. If so, the ‘maximumaggregate sum’ and the expiry date can be enteredinto the particulars.

The percentage of retention can also be entered inthe particulars. In the event that this is left blank,the default retention level is three per cent. If it isnot the intention to deduct retention then nil or zeroshould be entered.

Within the definitions section of the contract, thereis no further detail on retention other than adirection to the relevant contract conditions and thecontract particulars.

It should be noted that the contract does haveprovisions for advanced payment but this is notincluded in further detail in this guidance note.

The contract states that amounts to be included ininterim notices shall be subject to the deduction ofretention as noted elsewhere within the contract.The sum is noted as being retained by theemployer. It also notes that not withstanding theemployer’s interest in the retention, the employercan deduct from the notice other sums which aredue from the contractor under the contract. It isrecommended that appropriate notice be given forthis prior to deduction.

The final notice process is also detailed but there isno retention deduction included within this.

In computing the value to be included in anynotice, the value is split into two sections; the valuewhich is subject to the deduction of retention and

that which is not. It is advisable to review thecontract to understand which items fall into eachcategory but generally, value of works executedand material on and off site are subject to retentiondeduction.

The contract administrator/QS prepares astatement, for the employer and the contractor, ofthe retention to be deducted in each interim notice.

The employer deducts retention. The contractstates the following:

‘…the Employer’s interest in the retention isfiduciary as trustee for the Contractor (butwithout obligation to invest)’.

Unless the employer is a local authority, thecontractor may request that the employer place theretention monies in a separate bank account tocomply with the above statement. The employerwill certify that this has occurred to the contractorand then the architect/contract administrator. Theemployer benefits from interest earned on thisaccount.

If a retention bond is selected for the contract,retention is not deducted but the contractadministrator or QS still prepares a statement ofthe retention that would have been deducted fromthe interim notice.

Prior to the ‘Date of Possession’ (more simply,handover of the site from the employer to thecontractor), the contractor provides the bond to theemployer. The bond is to be as per the format setout in the contract and should state the maximumaggregate sum and the expiry date. These are alsoto be inserted in the contract particulars.

If the bond is not provided or maintained, retentionis deducted from interim notices thereafter ascalculated in the aforementioned statement. Oncedelivered, retention is no longer deducted frominterim notices and is therefore released to thecontractor.

If the retention that would have been deductedexceeds the aggregate sum stated in the bond thenthe contractor can either have the bond valueincreased or the excess retention will be deductedfrom the interim notice.

If the contractor has provided both a retention andperformance bond then ‘the employer shall havefirst recourse to the retention bond’. However, it

10 | RETENTION

should be noted that retention bonds andperformance bonds are generally required fordifferent purposes in that a performance bond willprovide surety for non performance in generalrather than failure to rectify defects.

Only half of the retention is deducted for the works,or section of the works, where practical completionhas been achieved but a Certificate of MakingGood Defects has not been issued. It is thereforeimportant to understand the value of each sectionof works in order to accurately calculate the level ofretention to be deducted, or for adjustments to thebond value.

Once the Certificate of Making Good Defects isissued, no retention is held from the followingnotice. Refer to the relevant contract clauseregarding the final notice.

The standard wording for the retention bond iscontained within the schedules of the contract.

Minor Works Building Contract

The Minor Works Building Contract has similarprinciples to the Standard Building Contract. Thesignificant variances are:

+ there is no sectional completion provision withinthe contract

+ there is no facility to enter the requirement for aretention bond; and

+ the level of retention is determined by the valueof works that will be paid rather than the valuethat will be withheld.

Details of the retention requirements are to becompleted in the Contract Particulars. Retention isstated as the amount to be paid rather than theamount to be withheld, i.e. a percentage of 95 percent is entered in the Contract Particulars if theintention is to deduct five per cent retention. Thereis a default value of percentage of work to be paidof 95 per cent if the contract is left blank.

There is a requirement to state in the ContractParticulars the amount to be paid once PracticalCompletion has been certified. As an example, thiswould be entered into the contract as 97.5 per centif the intention was only to deduct 2.5 per centretention. There is a default value of percentage ofwork to be paid of 97.5 per cent following PracticalCompletion but prior to Final Certificate if thecontract is left blank.

If the intention is not to deduct retention, then 100per cent should be entered.

The contract states that amounts to be included ininterim notices shall be subject to the percentageof total value of work. At Practical Completion, arevised percentage is applied as stated in theContract Particulars. All works are subject to thepercentage adjustments prior to and after PracticalCompletion but before final notice.

The final notice process is also detailed, once theCertificate of Making Good Defects is issued, butobviously there is no retention deduction includedwithin this. It should also be noted that the defectrectification period is only three months in thiscontract unless otherwise stated in the ContractParticulars.

Intermediate Building Contract

The Intermediate Building Contract has similarprinciples to both the Minor Works BuildingContract and the Standard Building Contract. Thefollowing points are noted:

+ there is sectional completion provision withinthe contract

+ there is no facility to enter the requirement for aretention bond; and

+ the level of retention is determined by the valueof works that will be paid rather than the valuethat will be withheld.

Details of the retention requirements are to becompleted in the Contract Particulars. Retention isstated as the amount to be paid rather than theamount to be withheld, i.e. a percentage of 95 percent is entered in the Contract Particulars if theintention is to deduct five per cent retention. Thereis a default value of percentage of work to be paidof 95 per cent if the contract is left blank.

There is a requirement to state in the ContractParticulars the amount to be paid once PracticalCompletion, for the whole of the works or asection, has been certified. As an example, thiswould be entered into the contract as 97.5 per centif the intention was only to deduct 2.5 per centretention. There is a default value of percentage ofwork to be paid of 97.5 per cent following PracticalCompletion but prior to Final Certificate if thecontract is left blank.

If the intention is not to deduct retention, then 100per cent should be entered.

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The contract states that amounts to be included ininterim notices shall be subject to the percentageof total value of work. At Practical Completion arevised percentage is applied as stated in theContract Particulars. In ascertaining the value to beincluded in any notice, the value is split into twosections; the value which is subject to thededuction of retention and that which is not. It isadvisable to review the contract to understandwhich items fall into each category but generally,value of works executed and material on and offsite are subject to retention deduction.

The contract administrator/QS prepares astatement for the employer and the contractor, ofthe amount due in each interim notice. Theemployer should then within five days give writtennotice to the contractor of the payment to bemade. However, this may be subject to adjustmentby a withholding notice, which must be issued fivedays prior to the final date for payment.

Where the employer is not a local authority:

‘…the Employer’s interest shall be fiduciaryas trustee for the Contractor (but withoutobligation to invest)’.

The final notice process is also detailed, once thenotice of making good is issued, but obviouslythere is no retention deduction included within this.It should also be noted that the defect rectificationperiod is only six months in this contract unlessotherwise stated in the Contract Particulars.

It should be noted that the contract does haveprovisions for advanced payment but this is notincluded in further detail in this guidance note.

Design and Build Contract

The Design and Build Contract is similar to theStandard Building Contract but the variances are asfollows:

+ In ascertaining the value to be included in anynotice, the value is split into two categories; thevalue which is subject to the deduction ofretention and that which is not, as features inthe Standard Building Contract. However, thereare two methods of establishing the grossvaluation and the option selected should beentered in the contract particulars; Alternative Ais selected for payment by stages andAlternative B for periodic payments. It is

advisable to review the contract to understandwhich items fall into each category in terms ofretention deduction.

+ There is no reference to a contractadministrator/QS and therefore the preparationof a statement, for the contractor, of theretention to be deducted in each interim noticeis undertaken by the employer.

+ If a retention bond is selected for the contract,there is no requirement to prepare a statementof the retention that would have been deductedfrom the interim notice had the bond option notbeen selected.

Prime Cost Building Contract

The Prime Cost Building Contract is similar to theStandard Building Contract but the variances are asfollows:

+ There is no facility to enter the requirement fora retention bond.

+ There is no facility for advance payments.

+ There are minor changes to the wordingregarding the contract administrator/QSrequirement to prepare a statement, for theemployer and the contractor, of the retention tobe deducted in each interim notice, but astatement is still required of the total amount tobe included in each notice.

Management Building Contract

The Management Building Contract is different toother JCT contracts reviewed within this guidancenote but has some common features with theStandard Building Contract and the IntermediateBuilding Contract, for example.

It should be noted that there is no provision foradvance payment within the contract.

Details of the retention requirements, including thepercentages, (for the management contractor’sretention only), are to be completed in the ContractParticulars. In the event that this is left blank, thedefault retention level is three per cent. If it is notthe intention to deduct retention, then nil or zeroshould be entered.

Retention bonds are referred to in the contract butonly in respect of the works contractors rather thanthe management contractor.

Within the definitions section of the contract,retention is defined as works contractors’ retention

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and management contractor’s retention. There isalso further direction to the other clauses within thecontract.

The contract states that amounts to be included ininterim notices shall be subject to the deduction ofretention as noted elsewhere within the contract. Inany notice the amounts due are as follows:

+ Amounts due under the works contracts lessany retention deducted in those contracts.

+ Prime cost of the management contractorexcluding items in the bullet point above thensubject to the deduction of retention, as per themanagement building contract.

+ Preconstruction fee cost.

+ Construction period fee subject to a maximumpercentage.

+ Costs associated with breaches by workscontractors or alleged default by themanagement contractor from the workscontractors. It is advisable to read the contractfor further detail on this.

+ Amounts deducted for previous payments,credits which the employer is entitled torecover, or credits for items such as materialsrecovered from the works.

The maximum percentage works in a similar way tothe ‘retention’ within the Minor Works BuildingContract and the Intermediate Building Contract.Details of this percentage are entered into theContract Particulars but the default percentage, ifleft blank, is 97 per cent.

The contract notes that not withstanding theemployer’s interest in the retention, the employercan deduct from the notice other sums which aredue from the contractor under the contract. It isrecommended that appropriate notice be given forthis prior to deduction.

The final notice process is also detailed but there isno retention deduction included within this.

The architect/contract administrator/QS prepares astatement, for the employer and the contractor, ofthe retention to be deducted in each interim notice.This separately identifies the retention for themanagement contractor and each works contractor.Where the works contractor has provided a bond,the retention stated is the amount that would havebeen held in the absence of such bond and noretention is deducted.

The employer deducts retention followingappropriate notice to the management contractor.The contract states the following:

‘…the Employer’s interest in the retention isfiduciary as trustee for the ManagementContractor and for each relevant WorksContractor (but without obligation to invest)’.

Unless the employer is a local authority, themanagement contractor, or the works contractorthrough him, may request that the employer placethe retention monies in a separate bank account tocomply with the above statement. The employerwill certify that this has occurred to themanagement contractor and then the architect/contract administrator. The employer benefits frominterest earned on this account.

For the management contractor’s retention, onlyhalf of the retention is deducted for the works orsection of the works where Practical Completionhas been achieved but a Certificate of MakingGood Defects has not been issued. The workscontractor’s retention is also reduced but pleaserefer to the management works contract to follow.

Once the Certificate of Making Good Defects isissued, no retention is held from the followingnotice. Refer to the relevant contract clauseregarding the final notice.

The release of monies related to the maximumpercentage applied to the construction period fee isreleased like the other retention but is releasedafter Practical Completion dependent on acomparison between the final prime cost and theproject cost plan. Refer to the contract for furtherdetails of this mechanism.

Management Works Contract

Details of the retention requirements are to becompleted in the works Contract Particulars. Thecontract has the facility to enter the requirement fora retention bond and the Contract Particularsshould be amended to indicate whether this isapplicable to the particular contract. If so, the‘maximum aggregate sum’ and the expiry date canbe entered into the particulars.

The percentage of retention can also be entered inthe particulars. In the event that this is left blank,the default retention level is three per cent. If it isnot the intention to deduct retention, then nil orzero should be entered.

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Within the definitions section of the contract, thereis no further detail on retention other than adirection to the relevant contract conditions and theworks Contract Particulars.

It should be noted that there is no provision foradvance payment within the contract.

The contract states that amounts to be included ininterim notices shall be subject to the deduction ofretention as noted elsewhere within the contractand also reference to the Management BuildingContract. The employer and/or managementcontractor can deduct from the notice other sumswhich are due from the works contractor under thecontract. Appropriate notice shall be given for thisprior to deduction.

The retention is noted to be deducted and retainedby the employer rather than the managementcontractor. This is deducted at the rate in the worksContract Particulars unless the works, or a sectionof the works, have reached Practical Completion.

Only half of the retention is deducted for the worksor section of the works where practical completionhas been achieved, or deemed to have beenachieved under the management building contract,but a Certificate of Making Good Defects has notbeen issued. It is therefore important to understandthe value of each section of works in order toaccurately calculate the level of retention to bededucted.

The contract notes that where works contractor’sretention is released to the management contractor,the management contractor’s interest in theretention:

‘…. is fiduciary as trustee for the WorksContractor, but without obligation toinvest).If the Management Contractor:

-1 mortgages or otherwise charges thewhole or part of the amount released or anyinterest in it (otherwise than by floatingcharge) or attempts or purports to do so; or

-2 withholds any of the Works Contractor’sRetention after the final date for payment ofsuch amount to the Works Contractor,

he shall immediately place any such unpaidretention (or an equivalent sum) in aseparate banking account so designated asto make clear he is trustee for the WorksContractor of the unpaid amount.’

If there are no defects in the works or sections ofthe works following the rectification period underthe Management Building Contract, retention isreleased to the works contractor in the followinginterim payment. If there are defects, they would benotified by the management contractor to theworks contractor. Retention is retained until thosedefects are made good.

If a retention bond is selected for the contract,retention is not deducted.

Prior to the date of commencement of the works,the works contractor provides the bond to themanagement contractor but in favour of theemployer. The bond is to be as per the format setout in the contract and should state the maximumaggregate sum and the expiry date. These are alsoto be inserted in the works Contract Particulars.

If the bond is not provided or maintained, retentionis deducted from interim notices thereafter. Oncedelivered, retention is no longer deducted frominterim notices and is therefore released to theworks contractor.

If the retention that would have been deductedexceeds the aggregate sum stated in the bond thenthe works contractor can either have this increasedor the excess retention will be deducted from theinterim notice.

If the works contractor has provided both aretention and performance bond then ‘recourseshall first be made to Retention Bond’. However, itshould be noted that retention bonds andperformance bonds are generally required fordifferent purposes in that a performance bond willprovide surety for non performance in generalrather than failure to rectify defects.

The standard wording for the retention bond iscontained within the schedules of the contract.

3.1.2 NEC Engineering and ConstructionContract

The NEC suite of contracts contains a set ofguidance notes and while individual NEC optionsare reviewed, a summary of the guidance notes isincluded as an introduction to the principles.

As well as retention provision, the ECC hasprovision to retain 25 per cent of any sums dueuntil such time as the contractor submits aprogramme for acceptance (if a programme is not

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referenced within the contract data). For thepurposes of this guidance note, this has not beenclassed as retention and therefore is not included inany further detail.

NEC ECC guidance notes

Retention is introduced into the contract by theselection of option clause X16. In order for thisclause to be included within the contract the optionclause should clearly be identified in section 1 ofpart 1 of the contract data.

In the contract data part 1, the employer/projectmanager should insert the retention free amount (asum up to which the contractor can be paidwithout the deduction of retention), and apercentage of retention. The figures inserted in theguidance notes are indicative only and theappropriate figures will be entered by the projectmanager/employer.

As previously explained, retention is deducted assecurity for the employer and an incentive for thecontractor to complete the works. It is noted thatretention will affect the contractor’s cash flow and itis advisable to consider this when completing thecontract data.

The employer may enter a retention free amount inthe contract data. The retention free amount can becompleted as nil to act as a more traditionalcontract. Retention is then applied in eachassessment for payment to the sum (price for workdone to date and not to any other sums), in excessof the retention free amount

Options C to F use gross payments to sub-contractors so that retention is not duplicated.However, it is also noted in the contract that optionclause X16 is not used with the main contractOption F.

The guidance note advises that where aperformance bond is required in accordance withthe contract then the retention clause is notnormally selected.

There is no maximum amount of retention that canbe deducted although it is noted in the guidancethat this can be created by amending the contractdata. It is recommended that surveyors takeextreme caution before amending a standard formof contract.

Half of the retention is released in the next paymentassessment, four weeks after the earlier of

completion or the employer taking over the wholeof the works. The remainder is released inaccordance with the payment core clausecontained within each of the options once theDefects Certificate has been issued. It isrecommended that payment clauses are reviewedwhere the contractor has not corrected notifieddefects. Once the Defects Certificate has beenissued then no amount is retained.

Options A and B

Please refer to section 3.1.2 on NEC ECC guidancenotes as there are no changes to the retentionprovision for this option.

Option C

Please also refer to section 3.1.2 on NEC ECCguidance notes.

In this option defined cost for subcontractors isdefined as:

‘…the amount of payments due tosubcontractors for work which issubcontracted without taking account of theamounts deducted for retention’.

This reinforces the issue in the guidance notesreview and ensures that retention is effectively notdeducted twice. However, this does mean thatwhere the retention option is not selected in themain contract then the contractor does not haveretention deducted and is paid the gross amount ofdefined cost in the assessment. However, thecontractor may choose to deduct retention from thesub-contractor if the appropriate optional clause isselected in the sub-contract.

Option D

There is no change to Option C. Please also referto the guidance note review in section 3.1.2.

Option E

There is no change to Option C. Please also referto the guidance note review in section 3.1.2.

Option F

There is no change to Option C. Please also referto the guidance note section above.

Please also refer to the guidance notes regardingthe use of option clause X16 with main Option C

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3.1.3 FIDIC Red Book and Orange Book

Red Book (Conditions of Contract forConstruction – for building and engineeringworks designed by the employer)

The definition of retention money is as follows:

‘“Retention Money” means the accumulatedretention moneys which the Employerretains under Sub-Clause 14.3 [Applicationfor Interim Payment Certificates] and paysunder Sub-Clause 14.9 [Payment ofRetention Money]’.

Note that this is a quotation from the first edition1999 and therefore may be subject to revisions,including the sub-clause references, in futureeditions.

The contractor is required to submit an applicationfor payment, referred to in the contract as aStatement, after the end of each month, whichshould include:

‘any amount to be deducted for retention,calculated by applying the percentage ofretention stated in the Appendix to Tenderto the total of the above amounts, until theamount so retained by the Employerreaches the limit of Retention Money (if any)stated in the Appendix to Tender’.

It is noted that no payments are made unless theemployer has received and approved theperformance security. Please refer to the contractand guidance notes for further advice on paymentand security/performance bonds. Also, there isprovision for a minimum payment certificate/notice.Please refer to the contract for more details.

Retention release is dependent upon the issue ofthe Taking-Over Certificate. This triggers the firsthalf of the retention release, which is certified bythe engineer. A Taking-Over Certificate may beissued for a section or part of the works. Here, only40 per cent of the retention is released rather thanhalf and this is proportional to the estimated valueof the section, compared to the estimated contractprice. This automatically increases to 50 per centonce the whole of the works has a Taking-OverCertificate.

The engineer then certifies the remaining retentionafter the latest expiry of the defects notificationperiods. However, if there was a Taking-Over

Certificate issued for sections of the works thenonly a further 40 per cent of the retention isreleased after the expiry of the defects notificationperiod for that section. Again, this is proportionalbased on the estimated value of the sectioncompared to the estimated final contract price.

Certification of the retention will be withheld ifremaining work is outstanding in accordance withthe defects liability clause. The amount withheld isthe estimated cost of the work to be undertakenand this is released once this outstanding work iscompleted.

It is also advisable to note the followingrequirement when calculating the proportions ofretention release for sections of the work, aspreviously noted:

‘When calculating these proportions, noaccount shall be taken of any adjustmentsunder Sub-clause 13.7 [Adjustments forChanges in Legislation] and Sub-Clause13.8 [Adjustment for Changes in Cost]’.

A review of the general payment clauses isrecommended but the application is the estimatedvalue of works up to the month end includingvariations, changes in legislation and cost asdefined elsewhere in the contract. It is also notedthat the contract contains provision for advancepayment, which will be stated in the Appendix toTender if the employer wishes this to be applicable.In summary, the contractor will receive reducedpayments until the advance payment sum is repaid.

It is interesting to note that the employer certifiesthe amounts which are due to nominated sub-contractors and the contractor then pays the sumthereby certified. The engineer may then requestevidence that the contractor has paid such sums tothe nominated sub-contractor after the deductionof retention, prior to issuing a payment certificate/notice to the contractor.

The defects liability clause may be relevant as itcontains clauses regarding extension of the defectsnotification period to a limited period and clauses,should the contractor fail to rectify defects. Thelatter may lead to the contractor having to pay theemployer the cost of rectifying the defects ordetermine a reduction in the contract price. While itis not stated in the clause, the balance of retentiondue back to the contractor will be used indetermining the payments required from one partyto the other.

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Guidance for the preparation of particularconditions

The contract contains guidance notes as previouslycovered, and there is guidance on retentions asfollows.

Payment of retention money: If the employerwishes to have a guarantee in place and allowretention to be released, a suitable clause will needto be added to the contract. This will need to beincluded in the tender documents and anappropriate form is included as an annex within thecontract. An example of a suitable clause is alsoincluded within the guidance.

Appendix to Tender

The percentage of retention to be deducted and thelimit of retention money will be entered in theAppendix to Tender, which will be sent to thetenderers during the tender process.

It is also noted that the contract contains aminimum amount of interim payment certificates/notices. Please refer to the contract for more detail.

Orange Book (Conditions of Contract for Design– Build and Turnkey)

The definition of retention money is as follows:

‘“Retention Money” means the accumulatedretention monies retained by the Employerunder Sub-Clause 13.3’.

Note that this is a quotation from the first edition in1995 and therefore may be subject to revisions,including the sub-clause references, in futureeditions.

The contractor is required to submit an applicationfor payment, referred to in the contract as aStatement, after the end of each month, whichshould include:

‘any amount to be deducted for retention,calculated by applying the percentage ofretention stated in the Appendix to Tenderto the total of the above amounts, until theamount so retained by the Employerreaches the limit of Retention Money (if any)stated in the Appendix to Tender’.

It is noted that no payments are made unless theemployer has received and approved theperformance security. Please refer to the contractand guidance notes for further advice on payment

and security/performance bonds. Also, there isprovision for a minimum payment certificate/notice.Please refer to the contract for more details.

Retention release is dependent upon issue of theTaking-Over Certificate. This triggers the first half ofthe retention release. A Taking-Over Certificate maybe issued for a section or part of the works. Here,part of the first half of the retention is certified bythe employer’s representative proportionally to thevalue of the section of the works which iscontained in the Appendix to Tender. Once taking-over is certified for all of the works, the retentionrelease will then equate to 50 per cent of theretention held.

The employer’s representative then certifies theremaining retention upon the expiry of the contractperiod, which effectively means 365 days after thewhole of the works are certified as complete by theemployer’s representative. It shall be noted that thisperiod can be extended up to a maximum period oftwo years if the works cannot be used due todefects or damage after the take over of the works.It is advisable to refer to the defects liability clausewithin the contract. Unlike the Red Book, theOrange Book does not allow for proportionalrelease of the second half of the retention wherethere is sectional take over.

Certification of the retention will be withheld ifremaining work is outstanding in accordance withthe defects liability or tests after completionclauses. The amount withheld is the estimated costof the work to be undertaken.

A review of the general payment clause isrecommended but the application is the estimatedvalue of works up to the month end, includingvariations and changes in legislation and cost, asdefined elsewhere in the contract. It is also notedthat the contract contains provision for advancepayment, which will be stated in the Appendix toTender if the employer wishes it to be applicable.The contractor will receive reduced payments untilthe advance payment sum is effectively repaid.

The defects liability clause may be relevant as itcontains clauses regarding extension of the defectsnotification period to a limited period and clausesshould the contractor fail to rectify defects. Thelatter may lead to the contractor having to pay theemployer the cost of rectifying the defects ordetermine a reduction in the contract price. While it

RETENTION | 17

is not stated in the clause, the balance of retentiondue back to the contractor will be used indetermining the payments required from one partyto the other.

Guidance for the preparation of conditions ofparticular application

The contract contains guidance notes as previouslystated and there is guidance on retentions asfollows.

Payment of retention money: If the employerwishes to have a guarantee in place and allowretention to be released, a suitable clause will needto be added to the contract. This will need to beincluded in the tender documents, however there isnot an appropriate form included as an annex. Anexample of a suitable clause is included within theguidance.

Appendix to Tender

The percentage of retention to be deducted and thelimit of retention money, should be entered in theAppendix to Tender, which should be sent to thetenderers during the tender process.

It is also noted that the contract contains aminimum amount of interim payment certificates/notices. Please refer to the contract or otherguidance notes regarding payments for more detail.

3.1.4 Common contract features

It can be seen from the three suites of contractsreviewed that, in general, the contracts use similarprinciples:

+ There are sections in the contract to enter thelevel of retention to be deducted.

+ The amount of retention may be capped at acertain level.

+ Retention is applicable to some but not alwaysall of the amount applied for or later certified.

+ A percentage, usually 50 per cent, of theretention is released upon completion of theworks but prior to the defects liability period.Retention is generally released for sections ofthe work where there is sectional completionwithin the contract.

+ A proportion of the retention is released uponcertification of sectional completion. This isusually dependent upon the value of thesection.

+ The remainder of retention is certified andreleased at the end of the defects liabilityperiod. This may result in multiple releaseswhere there is sectional completion.

+ Where the contractor does not rectify defects,the client/employer may use the retention heldto cover the cost of rectification of those worksby others.

+ Retention bonds are sometimes available wherethere is no requirement to deduct ‘cash’retention.

Please refer to individual contracts if they have notbeen reviewed within this guidance as they mayvary from the general principles set out above.

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4 Practical considerations (Level 3 –Doing/Advising)

4.1 Common issues

4.1.1 Problems with release

The release of retention will generally occur aconsiderable time after the project has beencompleted and occupied or taken over by the user.This often results in a change in personnel fromthose who were involved in the day to dayadministration of the project to those who deal withretention release. It is therefore important that asthey finish their involvement on the project, clearrecords are kept to allow others to administer thecertification of final retention monies at the end ofthe project.

Retention certification and release will be affected ifthere are defects in the works discovered in thedefects liability period but then not corrected insuch period. Dependent on the conditions ofcontract, an amount may be set off against theretention release in order that defects may berectified by others should the client/employerrequire. It is advisable to check the exact wordingof the specific contract in this regard. Any sum setoff against the retention should be fully justified.

Dependent on the conditions of contract, therectification/making good defects certificate maynot be issued until all defects are complete, whichmay be some time after the expiration of thecontractual rectification period. Some contractsissue a certificate, e.g. NEC ECC, listing thedefects outstanding at the end of the defectsperiod.

On smaller projects or further down the supplychain, the level of retention held may be a veryinsignificant sum. Therefore, the retention sum isnot large enough to incentivise the (sub) contractorback to correct the defective works. This will, ofcourse, depend on the value of the contract andtherefore the retention held and the severity of thedefect. Also of consideration may be theimportance of the client/employer to the contractoror sub-contractor. When filling in the particulars ofsuch a contract or sub-contract, it is advisable to

consider whether or not retention should bededucted. In some cases, the cost of administeringthe retention withheld at the end of the contractmay be high in proportion to the actual paymentsum, or some of the problems outlined may occur.However, the employer may still wish retentionprovisions to apply.

4.1.2 Financing/insolvency

There is a possibility that the employer/client,contractor or sub-contractor may become insolventat any stage or during the defects liability period.The JCT form of contract deals with this by notingthe employer is a trustee for the contractor. Thiswill protect the contractor in the event of insolvencyof the employer, if the money is actually set asidein a separate marked account or fund, rather thanjust held in a regular client account. It will thereforebe the responsibility of the administrator orliquidator to apply for or administer the retention asapplicable. If the retention is not set aside in aseparate marked account, this is likely to lead to adelay in such payment.

After a client/employer goes into liquidation, abank’s charge over the fund will take precedenceover the contractual obligation of the client/employer to place funds in a separate account, i.e.if the client/employer is in breach of his obligationto set aside the retention fund, and the contractorhas not successfully insisted this takes place, theobligation and breach are not considered whenprioritising unsecured creditors.

This is the position in the standard forms, howeverit is common for these provisions to be amendedby clients and the signed agreement should beconsulted.

4.1.3 Latent defects

The contractor/sub-contractor will be issued with alist of defects to be made good in accordance withthe provisions of the relevant contract, followingcompletion of which retentions will normally bereleased. Sometimes the contractor/sub-contractorwill continue to receive notification of latent

RETENTION | 19

defects, in addition to the list issued at the end ofthe defects liability/rectification period. Thecontractor/sub-contractor is entitled to receipt ofretention payments/release from retention bonds,once the contractual provisions have beencomplied with, notwithstanding that the rectificationof some latent defects may remain outstanding.

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RetentionRICS Professional Guidance, UK

1st edition, guidance note

Retention1st edition, guidance note

This guidance note introduces the subject by looking at the generalprinciples of retention, including areas such as law; reasons forintroduction within a contract; levels of retention, and how amountsare deducted, certified or released.

It then focuses on how the standard forms of contract deal with theissue. A list of the contracts reviewed is included within the table ofcontents. This paper reviews methods and limits of deduction,inclusion of the retention amount to be included within the contract,release and set off against sums held.

The guidance note concludes with a review of common issuesincluding areas such as commonly occurring problems; financing;insolvency, and defects rectification.

Guidance is given for each of the main groups of contracts andthe forms in most regular use within those groups, under thefollowing headings, which map to the Assessment of ProfessionalCompetence (APC):

• General Principles (Level 1 – Knowing)• Practical Application (Level 2 – Doing)• Practical Considerations (Level 3 – Doing/Advising)

rics.org/standards rics.org/standards

GN 90/2012RICS QS & Construction StandardsRICS QS & Construction Standards (the ‘Black Book’)