This is an article written by me a Freelance QS about construction retention. Where did this system start and how can we help ourselves release retention monies?
Construction Retention - Written 2008/9
The construction retention system originated in the railway construction sector in the 1840's. The vast and rapid expansion of the railway network led to a high demand for construction workers and the subsequent creation of a large number of small construction companies. Inevitably a lot of these newly formed companies became insolvent. The rate at which such companies were becoming insolvent caused delays and cost's to the clients that employed them. Therefore the client's started deducting monies from payments to ensure there was a fund available to them to help defray the cost of completion and thus retention was born.
Outstanding construction retention has never been more prevalent than today due to the recent global recession and the down turn in the UK construction market. Sub-contractors are inevitably relying on their outstanding construction retention monies as both profitability and cash flow within the construction industry are coming under increased pressure.
It is not uncommon for small-medium enterprises (SME's) to have upwards of £200,000.00 tied up in retention. The boom times from 2002 – 2007 must have been really good for SME's to lose focus on how important chasing retentions are. It is estimated that over £3.25bn is retained via retentions on construction projects each year.
During the boom years sub-contractors were regularly achieving tender margins on average of 20% – 25% OHP on cost. Therefore the impact of not chasing construction retention payments in an organised and timely manner was not solely going to place companies into administration. However since construction market growth has been in decline and the supply of sub-contractors is far outstripping the demand. This has inevitable led to deflation within the construction market and now sub-contractors are only achieving tender margins on average of up to 15% OHP on cost. This figure should send instant alarm bells ringing in all financial directors ears. On average most sub-contractors operating expenditure (overheads) is 10%-12% of annual turnover. Most sub-contracts call for a 5% retention of monies, therefore if sub-contractors do not come up with sufficient systems and manage the release of construction retention properly it is now inevitable that the withholding of retention could place sub-contractors into administration.
There have been various debates between the specialist sub-contractor trade organizations and the government to find an alternative to cash retention. The most recognised alternative is the retention bond. For a number of years retention bonds have been offered by surety companies as an alternative to retention. However, such a bond does not remove the difficulties of operating a retention system it simply shifts the mechanism by which the security is provided.
The other alternative is for the government to bring about a legislation that illegalises the holding of retention monies. Any change to the current system must be led by the government as over 40% of all new construction projects are publicly funded. For this bill to be passed the construction industry must first provide a defects-free product, at present the thought of a defect free construction project is not plausible but it is the responsibility of all sub-contractors to try and achieve this goal.
Most Main Contractors now operate a supply chain agreement with sub-contractors. This is a step in the right direction to eliminating retentions. The sub-contractor by continually working with the Main Contractor and knowing the operating procedures and standard of work required should see his defects eradicated or diminished through familiarization and good working practices.
The answer to construction retentions is simple, if there are no defects; there is no need for upstream retention monies. Therefore you might say that the sub-contractor has his own destiny in his own hands with regard retention.
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