Author, Andy Roberts, Surety Account Executive, Rancho Mesa Insurance Services, Inc.
Retention is a very common practice within the construction industry that typically involves 5-10% of each payment to the subcontractor being withheld until the project has been completed. The purpose behind this is simple, it is designed to make sure that subcontractors satisfy their contractual agreements before they receive their last payment for the work they have done. While this practice serves a real purpose, it can cause significant issues for subcontractors if the payments are delayed.
Regardless of the reasons why a retention payment could be delayed, whether it be overall project completion delays or if there are issues with the work performed, the delay in payment can cause significant cash flow issues. For subcontractors that do a lot of bonded work, cash flow issues will have a direct impact on their working capital which can have a negative impact on their bonding program. However, there are some strategies that subcontractors can employ to get their payments released sooner, like negotiating the terms of the retention release in the contract.
Prior to signing the contract, it is important that a subcontractor review and attempt to negotiate any unfavorable retention release terms. One option is negotiating a 10% retention down to 5% in the contract. Should that not be achievable, subcontractors can provide performance and payment bonds which might convince the project owner and/or general contractor to lower the retention amount or release the retention sooner.
Performance and payment bonds protect the project owner and the general contractor in case the subcontractor fails to fulfill their contractual obligations, which is the main reason that retention is being withheld. Therefore, the presence of bonds on the project may allow a subcontractor to negotiate terms that are more favorable to them, potentially lowering the percentage withheld from each payment, or even getting it released at earlier points within the project.
While retention remains a standard practice within the construction industry, it can cause significant issues for a subcontractor should those payments be delayed. So, negotiating these terms in all contracts is vital while also using the ability to provide bonds on the project as a solution to getting more favorable terms.
Should you have any questions about this or you are having issues with retention being withheld, reach out to me at aroberts@ranchomesa.com or 619-937-0166.