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Retention and the current state of the construction industry

4 September 2018

A retention is a percentage of the contract payment value which is held by the Employer as a security for the quality of the workmanship and materials. That is why, usually, half of the retention is released at achievement of practical completion, when the work is finished, and only patent defects are to be rectified.

The old BIFSA (Building Industry Federation South Africa) “white form” contract provided for a retention fund to be held by the Employer as a guarantee for the completion of the contract. The retention was held in an interest-bearing account and such interest accrued to the benefit of the Contractor.

When the JBCC was adopted, this arrangement was abandoned.

A relatively recent development is the adoption of the provision of a retention guarantee which is usually provided as an alternative to a cash retention. This is attractive for the employer because it means at day one, he has security for the full value of the retention and will not have to wait until most of the work is done before he gets a meaningful security against defective work.

However, some employers consider that “cash is king” and prefer a cash retention. The following issues are associated with how cash retentions work in practice:

  • Late payment or release of the retention; and
  • Non-payment of retention monies
  • Insolvency of the holder of the retention money

Late and/or non-payment or release of the retention

Unjustified late and non-payment of retention monies is a significant cause of issues associated with the practice of holding cash retentions within the construction sector.

Unfortunately, retention have also been used as a poor excuse to withhold or avoid paying contractors and are now viewed by many as an unfair and potentially problematic arrangement and currently, there are no measures in place to tackle the issues.

The late or non-payment usually results in cashflow issues for the contractor or the subcontractor.

It is therefore important for the employer, or the contractor in relation to sub-contracts, to ensure that they comply with contractual provisions, not only in the deduction of retention monies, but also their release.

How to protect yourself

Knowing your rights as a contractor (or subcontractor) will help to ensure that you get paid on time by looking out for the following issues;

  • The Subcontractor should seek to ensure that the release of their retention is not tied to the completion of the main contract and/or the release of the retention fund under that main contract;
  • Ensure that the deduction made is in accordance with the contract, in the right amount and that the right percentage is deducted;
  • Retention monies are held in trust or insisting on a retention guarantee.

What happens to retention monies when the party holding the monies is insolvent?

In the event of the holder of the retention being placed under business rescue, the retention monies will be mixed with other sums and or monies in the business. The business rescue practitioner would be entitled to use the money to try and rescue the business or company. The retention monies will be subsumed with the rest of the money and can, effectively be lost.

Should business rescue proceedings fail, and the business rescue practitioner applies for the company to be placed in liquidation, the contractor or subcontractor is a concurrent creditor and not a secured or preferred creditor. This means that the contractor or the subcontractor is left to stand in line with all the other creditors for a share of the distributable assets.

As a result, a large proportion of retention monies are lost due to the holder of the retention being insolvent.

International move towards “No retention policy” or retention money trust account

There has been a move aimed at doing away with the negative effects of the holding of cash retention in the construction industry.

In 2011, a “No Retentions Policy” was launched in Scotland designed to help contractors resist cash retention policies.

In Australia, a trust account scheme for subcontractor’s retention money held by main contractors commenced on the 1st of May 2015 as a part of security of payment of the retention monies.

The purpose of the trust is to ensure that in the event that the party holding the retention is insolvent, those monies are not mixed with the other sums and can easily be identified and paid in terms of the contract.

South African context and conclusion

It is advisable for the parties to a construction contract to include a provision for a retention guarantee, in lieu of the cash retention. Alternatively, the parties can include a clause for a retention fund held by the Employer as security and providing for any interest on such fund to accrue to the Contractor upon completion of the work.

The protection in respect of the release of retention money is crucial to ensure and secure certainty of cashflow which is very crucial in the current state of the South African construction industry.

Author: Nombuso Shange, Associate.