retention in progress billing in a construction

[neeron07]

Hi!
Can anyone help me to explain what is a retention in progress billing? what is the purpose of this?
Thanks in advance.

 

[Ron]

Retention or retainage in construction is a common method of protecting the owner from paying for incomplete processes or materials. It is a progressively collected amount that ultimately accumulates to an agreed amount of money, usually 10% of the construction cost. So for each progress billing, 10% of the amount will be withheld from payment to the contractor. When the project is completed, the retainage is held until final acceptance by the owner, usually an agreed time between substantial completion and final completion, both of which are defined terms in most construction contracts.

If you are referring to retainage held on a professional services contract (say for a consulting engineer working on a long term project), in my opinion this is never appropriate as it places the engineer in a potentially compromising position of perhaps having to make decisions based on getting paid, not making the appropriate technical decision. Most engineers would do the right thing and make a proper technical decision; however, increasingly engineers are out of the decision loop because of non-engineer managers pushing the decision process. A soapbox I'll avoid for the moment!

 

[JedClampett]

Retention is an amount of money (usually 10% until half the project is billed, and nothing after if the contractor is behaving) held back from each payment. The theory is that if the contractor is completely paid at the end of the project, you have no leverage for to complete punch list, demobilization or warranty items.
Contractors positively hate it. Sometimes it's allowed to be put into an escrow account, where the contractor gets the interest, but this needs to be agreed upon by all parties.

 

[bimr]

Construction contracts have a portion of payments deducted from the progress payment amounts due to the Contractor. This amount is called retention and is detailed in the project specifications and contract. For municipal work, the retention amount is typically 10% from each approved progress payment, depending on the Contract value. Generally, the retention is held until the end of the Contract. For high value Contracts, the retention may be reduced when the amount paid of the original contract equals 50%. The municipality may then, at its sole discretion, discontinue further retention on the original contract value for all subsequent progress payments.

Retention is a valuable cost control tool for the Construction Manager for three reasons. First, it provides an incentive for the Contractor to continue to complete the construction in order to get the retention at the contract closeout. Second, it ensures that the construction work is performed correctly since retention is not released until all items in the Final Inspection Correction List are corrected. Third, in the event of financial difficulty or default by the Contractor, retention monies can be used to pay subcontractors or make corrections to in-place work that the Contractor does not correct.

 

[hokie66]

Looks like Ron, Jed, and bimr are all keeping to the same schedule. And they all gave essentially the same correct answer.

Just to add another option which is available in some countries, but probably not all--in Australia, and I believe in much of Europe, retention bonds are common. Instead of cash retention by the Owner, the Contractor posts a bond, usually written by a bank or insurance company, for an amount equivalent to the specified retention. That way, the Contractor has to pay the bonding cost but improves his cash flow, while the Owner achieves the same degree of protection.

 

[Hoaokapohaku]

All of the above accurately describes the supposed rationale for retention. The REAL reason is so the owner or agency has a pile of the contractor's cash that can be used to twist the contractor's arm until he performs extra work for free. Usually, the extra work is required because of an omission in the plans and/or specs and SOMEBODY has to pay for it so it might as well be the contractor since the owner/agency doesn't have the money or desire to pay, but they do have the leverage to make someone else do it for free. In such cases, the contractor could always make a claim, or suit to collect for the extra work, but most of the time the cost to pursue those options costs more than doing the work for free, so owners/agencies usually get away with it.

I have seen retention used properly as others described a few times over the years. I've seen it used the other way more times than I could possibly count. It's wrong.

Can you guess which side of the fence I've spent most my career?

 

[hokie66]

I think so, Hoa, but those of us on the other side also have lots of stories about the "GOTCHA" game being played by contractors.

 

[Ron]

The GOTCHA as noted by hokie66 is the one I live every day. I deal with this routinely in forensics, where contractors have shortcut every process they can and have taken advantage of every deficiency in the plans/specs, in an effort to squeeze more profit from the job. Quality is secondary or even lower.

In the past 10 years I've seen so many failures that have occurred within 5 years of construction completion it isn't even funny. The piddling 10 percent of contract cost is covered several times over by the contractors...yet the owners have to sue the contractors to recover some small percentage of the cost of repair of the defects...assuming they are successful in the lawsuit, which they also have to pay for. Not much of an equitable situation for the owners!

 

[fel3]

Hoa…

Your experience is vastly different from mine. I have 32 years of experience, mostly (~95%) consulting for public agencies in California. I have worked with the US Bureau of Prisons, the US Navy, the California Department of Corrections, and numerous counties, cities, and special districts. I can't recall ONE instance where an owner (public or private) wanted out-of-scope construction work done for free. I have helped resolve scope of work disputes, but if the work requested is determined to be outside the scope of the construction contract the owners have paid for it without too much fuss.

On the other hand, I have had owners request (mostly unsucessfully) that I provide out-of-scope engineering services for free. The mind-set seems to be that since construction is tangible and visible it ought to be paid for, while engineering is intangilble, esoteric, and maybe even magic, and thus has little to no real value worth paying for. The worst case of this I can remember came from a Grade V wastewater treatment plant operator who sat on the board of special district I consulted for. He had worked with engineers for ~30 years, but was so clueless that he asked me questions like, "Aren't all engineers the same?", "Can't you just push a button on your computer to get the design?" (I wish), and "Why can't engineers eliminate change orders?"

==========
"Is it the only lesson of history that mankind is unteachable?"
--Winston S. Churchill

 

[Hoaokapohaku]

fel3 - The better part of wisdom tells me I have already said too much about this topic. I will say not all agencies are equal in this regard, and the federal agencies tend toward more fairness in my experience.

 

[dik]

The purpose of the 10% holdback varies depending on local lien legislation... and it is held back until the end of the lien expiration date and the owner or rep receives a Statutory Declaration that all sub-trades and suppliers have been paid.

My understanding <G>.

Dik

 

[neeron07]

hi guys! I really appreciate your help. thank you for answering my question about retention. It's a big help for me to really understand it deeply. Thanks a lot!