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How to Manage Construction Retention

26 Jan 2024 • 11 min read

Anna Fischer

Construction Content Writer

Retention is a nuanced aspect that requires special attention to regulatory compliance and contractual intricacies, especially in construction contracts. Effective retention management is crucial to your construction business’s success and financial stability.

In this article, you will find some insights for successful retention management in construction.

What is Retention in Construction?

Retention in the construction sector is withholding money from a payment to a contractor or subcontractor until the contracted project is completed to a satisfactory standard within an agreed time period, as outlined in construction contracts.

There is a nuanced distinction between “retention” and “retainage”. In specific contexts, “retainage” denotes the money being withheld, whereas “retention” refers to the action of withholding the money.

The dual-purpose of retention includes incentivizing timely and budget-compliant project completion while serving as a security measure against breaches of contract. Construction contracts typically specify the percentage retained (e.g., 5% of total cost), the duration of retention (often three months post-completion), and conditions for release (e.g., contingent on satisfactory inspection).

Retention is crucial for maintaining financial stability throughout the construction process. It encourages accountability, ensures adherence to quality standards, and provides a financial buffer for dispute resolution in cases of non-payment or late payment.

The UAE Practice

In the UAE, it's common for employers to keep a portion of each payment during construction. Usually, 10% is held back, with 5% released after the project is taken over and the remaining 5% after the defects liability period ends.

Although the UAE Civil Code doesn't explicitly mention suspension rights, Article 247 acknowledges the mutual obligation of parties to fulfill their contract. The law allows for non-performance if one party doesn’t meet its obligations. Due to uncertainty, construction contracts often include specific provisions about suspension.

Step-by-Step Process of Retention in Construction

Here, we provide steps to make your management of retention clear.

Establish Contract

When initiating a construction project, it's crucial to establish comprehensive contract terms. The terms include:

Detailing payment schedules
Addressing subcontractor provisions
Outlining dispute resolution options

Clear payment deadlines are essential to avoid cash flow issues. Contracts should specify provisions for subcontractors, covering insurance and safety. Remember dispute resolution clauses — they’re vital for cost control.

Thoughtful contract drafting ensures mutual protection and sets expectations for timeline, cost, and quality, fostering trust and confidence in the project's progress.

Point Retention Clause

Retention clauses hinge on the following:

Understanding laws
Regulations comprehension
Industry practices

Success also depends on negotiating with subcontractors to clarify rights and obligations in the agreement. When delving into negotiating retention clause language, you can meet some considerations:

Understanding whether the payment encompasses both labor and materials
Establishing the particular time of payment
Defining when the project’s completion is
Recognizing the significance of belated payments — when, how much, and determining the forefront during disputes

Before committing to any specific terms, you must navigate through the intricacies with precision, ensuring that the contract is carefully compiled and understandable to the sides.

Run Retention Funds

For efficient retention funds management, you can do the following:

Adhere to legal and contractual obligations. When handling retention money, you must consider both parties’ legal requirements and contractual obligations. Adherence to specific release timelines in contractual agreements is crucial for maintaining project progress. Timely resolution of disputes is essential to prevent any adverse impact on the release of retention money.
Engage third-party administrators. You may also opt for third-party administrators to manage projects and oversee retention money releases. These administrators assure compliance with contractual terms, legal regulations, and relevant laws. Their expertise can help you navigate the potential risks of holding substantial funds for extended periods, aligning with contract specifications.
Utilize financial software for compliance. Implementing financial software aids you in ensuring compliance with contractual obligations. The software provides alerts for timely payments, facilitating the tracking of payment changes due to factors like price fluctuations. Automation of retention money release processes reduces manual errors, enhancing overall efficiency in financial management.

FirstBit ERP software is one of the simplest ways to manage your payments, including retention money.

Manage Prepayment

The effective management of retention funds can be enhanced by exploring prepayment options, including prepayment plans, payment advances, and strategic payment scheduling. Late payments can lead you to specific challenges.

Plan. Prepayment plans empower you to receive funds before project or service completion, enabling coverage of costs related to materials, labor, taxes, and other ongoing expenses. This proactive approach aids in financial flexibility during project execution.
Advance. Payment advances offer an immediate infusion of cash, providing you with timely access to funds before project completion and inspection. This option facilitates financial liquidity and flexibility, mitigating potential challenges associated with delayed payments.
Schedule. Payment scheduling allows you to plan and ensure timely submission of necessary documents. It also provides an opportunity to negotiate favorable early payment terms. Strategic planning enables you to capitalize on discounts offered for prompt invoice payments, creating incentives for subcontractors and suppliers as well. Early payments expedite reimbursement, allowing stakeholders to transition smoothly to the next project or procure additional resources.

Keep Records

Collect, organize, and store crucial project information, including contracts, plans, drawings, specifications, communications, and invoices. Do this in different ways:

Store paperwork securely, electronically or physically, organized by project phases for quick retrieval. Regular backups prevent potential data loss.
Maintain two copies of contract-related documents, ensuring both parties sign off on changes. Thoroughly document proposed revisions during negotiations. Consider creating a spreadsheet for efficient progress tracking.

Adhere to Regulatory Compliance

Non-compliance with relevant construction regulations of different levels (federal, local, and other) may lead to substantial financial penalties and legal repercussions.

Security Measures

Familiarize yourself with all contractual terms related to retention management.
Comply with inspections regulations, ensuring certified personnel perform required inspections before payment release.
Maintain up-to-date documentation for subcontractor services throughout each contract period.

Dispute Handling and Industry Practices

Establish strict criteria for handling disputes related to retaining funds.
Be aware of industry standards regarding withholding percentages until project completion in specific areas or regions.

Continuous Compliance Monitoring

Review and stay updated on changing construction regulations regularly.
Conduct periodic reviews to maintain accurate records and ensure proper remittance of withheld funds upon satisfactory completion of contracted services.
Keep informed and compliant for contracting businesses of all sizes to avoid fines and legal issues associated with non-compliance errors.

Turn to Insurers and Bondsmen

Insurers provide financial protection against unforeseen losses. Bondsmen guarantee the completion of contractual obligations before retention funds are released.

You must know insurers and bondsmen and understand their policy terms and agreements. Also, you need to ensure all project parties have adequate coverage, including workers’ compensation and liability insurance.

You can establish relationships with multiple insurers or bond companies to access diverse coverage options at varying premiums.

Mind the claims process for insurers and bondsmen in case of unforeseen issues during the project.

Release the Retention Funds

To effectively release the retention funds, you need to compile a list of measures in advance to avoid confusion. Among these measures are:

Establish clear agreements on payment terms and clauses for withholding retention funds.
Include details like waiting periods, withheld portions until project completion, and milestones for full release.
Comprehend relevant regulations and laws governing retention fund release during negotiations with clients.
Define expectations and timelines in contracts, documenting progress throughout the project to preempt disputes.
Mediate disagreements between you and your clients, aligning with industry standards.
Maintain detailed records, including digital copies of hours worked and invoices, safeguarding against disputes over compensation rates or time frames.

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Risk Management Techniques

When navigating the complexities of retention, we strongly advise prioritizing risk management, ensuring security for both parties involved. Some effective techniques include:

Identify contractual risks. Be vigilant about contractual obligations, especially regarding timely completion and quality standards. Proactively identify potential areas of risk before entering into agreements.
Ensure project security. Safeguard investments by providing sufficient funds for unexpected costs. Assess the impact of changes on budget, timeline, and legal obligations related to the job site.
Mitigate retention risk. Protect against lost payments by seeking strong financial guarantees or securing bond insurance coverage for high-value projects. Minimize the risk of financial losses due to unpaid debts or failed projects.
Proactive risk management. Address external risks such as weather conditions and safety hazards early on. Proactively manage retention issues throughout the project life cycle, minimizing delays and unforeseen expenses.

First Bit provides a solution for monitoring costs and has a function of document hierarchy structure. Utilizing FirstBit ERP can keep the important information at hand and enhance your risk management.

Benefits of Early Release

Efficient project management in construction involves use of early release strategies, offering several benefits:

Quicker turnaround time. Early release significantly accelerates construction project timelines, ensuring timely completion. This expedites payments for all parties involved and prevents costly delays and overruns, fostering a more efficient construction process.
Cost savings opportunities. Potential cost savings arise from purchasing materials at lower prices and optimizing labor hours. The extent of savings depends on the size and complexity of the project, providing an avenue for better financial management.
Incentives for early completion. You can enhance motivation by offering various incentives such as bonuses, gift cards, or vouchers. The choice of incentives should align with the target demographic and project specifics, fostering a positive and motivated workforce.
Personnel resource management. Efficiently deploying and managing personnel resources throughout the job site minimizes idle time. Preventing excess staff during inactive periods results in substantial savings over the contract's duration, optimizing resource utilization.
Customer Satisfaction. Providing adequate time for necessary changes or updates before the final inspection boosts customer satisfaction. Consistently meeting expected timelines and budgets establishes trust and reliability.
Business Advantages. With effective early release strategies, you can build a reputation for timely completion and superior craftsmanship. This positive reputation accelerates contract acquisition, leading to increased profits and higher margins per project, contributing to sustained business success.

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First Bit Assistance

FirstBit ERP software plays a crucial role in helping you manage and calculate retention in construction projects.

Automated Tracking

FirstBit ERP system automates the tracking of retention amounts for each subcontractor. The software maintains a detailed record of retention percentages or amounts held for every contract, streamlining the monitoring process.

The software contains detailed list of entities:

Contract Compliance

Our ERP systems assist in ensuring compliance with contractual agreements regarding retention. The software can be configured to apply the correct retention rates based on contract terms and conditions. Also, FirstBit ERP helps you count VAT in retention, just put the percent and period values. Also, FirstBit ERP helps you count VAT in retention, just put the percent and period values:

You can also set up notifications, how much time has passed from the original invoice.

Besides, you can manage subcontractors, filling in percentages by task, from which the system will calculate the percentage.

FirstBit ERP feature of real-time data allows you to have immediate access to retention figures. The function enables quick decision-making and provides a clear picture of the project's financial status at any given time.

FAQ

1. What is the retention amount in construction?

2. What is a retention guarantee?

3. How to calculate retention construction?

4. What is the purpose of the retention fee?

5. Who holds retention money?

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Anna Fischer

Construction Content Writer

Anna has background in IT companies and has written numerous articles on technology topics.

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