Retention is usually 10% of every pay application. Some entities allow this money to be put into "securities in lieu of retention" by a surety so that the contractor can earn interest on these monies. Also, if the contractor is performing adequately, this can be reduced to 5% at the midpoint of the project. This effectively stops retention.
If you use some standard construction tender and contract documentation, i.e. Construction Specifications Canada documentation, you will find the answers there.
Generally my experience has been tender deposit, which will be used by the owner to compensate for the difference between low and next bid should the low bidder refuse to enter a contract is 10%.
Performance bonds, which is used to complete the contractor should he become bankrupt, insolvent or otherwise unable to complete the work, 50%.
Labour and Material payment bonds, which are used to ensure payment of work already completed, 50%.
Holdback or retention, which held under authority of the provincial builders liens acts, and is used to pay for labour and material after completion of the work, (usually held for 40 days to correspond with the allowable period for filing liens) is 10 %. (Some provinces specify a minimum of 7.5%). The holdback is usually placed into a separate account in trust for the builder and by law can only be used to pay any filed liens.
In my opinion these amounts are too high. The usual process is that the contractor files monthly progress draws. Starting at the second progress claim, the contractor is required to file a statutory declaration (sworn statement with the same penalties if false as perjury in court) stating that all labour and sub contractors owed money from the previous payment have been paid out.
The owner knows that the contractor has cleared all debts monthly, has the unearned and unpaid amounts still in his possession for the uncompleted portion of the work ready to complete the work should the contractor go bankrupt.
The cost of these bonds is also significant. Depending on the contractor, how much assets he has pledged to the bonding company, his work history, the type of construction etc, the bonds can cost as much as 2% of the contract value. The only use I have ever had for bonding companies is to call them and warn them that the contractor is not performing on time and that the bond is at risk. They will then contact the senior management of the construction company who will in turn expedite the work. I will use this to get their attention.
A friend of mine became involved in one job where the previous construction manager had approved excessive progress payments and the contractor went bankrupt. The bonding company refused to honour any amounts as performance bonds other than the unpaid amount of the contract. Their reasoning was that the progress was certified and therefore they were off the hook.
Bonding is a type of insurance. Examine the risks and take steps to mitigate them. I once managed a $CDN 25,000,000 project with no boding. We examined all contractors financial statements, invited bids only from established firms and worked on a fast track schedule. The payment process lagged the construction by the normal 30 days and that was sufficient cushion to satisfy the owners need to cover the risk.
Rick Kitson MBA P.Eng
Construction Project Management
From conception to completion
There are some fairly standardized mechanism's, and RDK pretty much covered that pretty well. However, I suspect that you are wrestling with the issues of tender security, performance bonding and holdbacks due to your local situation and perhaps the type of contract you are preparing. I have faced those issues many times and it has always come down to the amount of risk you are prepared to assume. Smaller construction contracts, service contracts (ie. hauling) and material supply (ie. aggregate crushing) are fairly minimal in terms of risk and can be dealt with accordingly. I have gone with a tender deposit and performance security of cash or irrevocable letter of credit in an amount I determined necesary to either complete or remediate an abandoned contract. I usually retain holdbacks in an amount of 10% and won't release any portion unless a statutory declaration is executed (certifying that all subs and debts are paid) firstly.
