In this article we cover:
- What is retention in the context of a construction contract
- Problems with retention
- When to cut your losses
- Finding an arbitrator
- How the payments work
A process of retaining a percentage (typically 2.5 to 5 per cent) of payments due to the builder, known as the principal contractor (PC), is intended to ensure that any defects will be remedied and the work completed in accordance with the building contract.
Retention is not only applied to the final payment but should also be calculated and shown at the interim payment stages. Statements of retention amounts applicable to subcontractors should also be provided at each stage.
The system is fine in principle and in many cases it all works out well for both the contractor and client, with no disagreements.
Problems with retention
In some instances, you can encounter objections by builders as to what defines certain defects and what is meant by completion. I once encountered a builder who refused to accept that it was his responsibility to provide sight splays for a site in the countryside. It was all a bit strange; however, it was eventually sorted out but would have been much easier if a contract had been in place.
Other arguments might be that certain materials or products supplied by others were not up to standard and therefore not the builder’s responsibility. These objections are usually relatively simple to remedy, although some can be trickier.
For example, if a plasterer used unwashed sand in the mix and the external render was later found to be severely defective (I’m talking from experience again), it may require testing to establish the constituent elements. It is then a matter of ascertaining that the tradesperson, who should have known better, used substandard materials and is responsible for putting it right.
When to cut your losses
In most cases, you should find that retention is a two-way street and although you might not get every little thing resolved, you should push for those things which you have prioritised as essential.
When checking items subject to tolerances, where they have been variable and allowable limits in their finished dimensions, you may need advice from your designer or certifier to ascertain what is a defect and what is not.
Of course, if you have engaged a snagging surveyor to prepare the snag list, he or she will already have deleted any items which could not be regarded as defects
Finding an arbitrator
In some cases, the self-builder could try to reduce the potential for a difficult completion phase, before the snagging survey begins, by firstly seeking advice from a legal expert (i.e. a solicitor or contract law specialist) and asking whether a new build inspection report can be prepared to form an ancillary part of the contract. Then ask the PC for confirmation in writing that all defects will be made good.
The warranty provider can also offer a free resolution service if you and the PC fail to agree and there may also be a clause in the contract which identifies a nominated independent adjudicator.
Builders do have a responsibility to remedy any defective items which do not meet the standards required by the building warranty. Be aware that some warranties are written mainly to protect the builder, so you should always check out any warranty provided by a builder well in advance of when it might be needed.
Payments
Of the total agreed retention amount, half of the money is usually released when the certificate of practical completion is submitted. Then, at the end of the defects period, the remainder is paid when the certification of making good defects has been issued.
Note that although, in effect this marks the completion of the works, latent defects may subsequently appear, and the property owner no longer has any contractual rights to insist that the builder corrects any of them. If the builder does not commit to remedial works on latent defects, then a legal action to seek redress for damages may be pursued.
Retentions can cause some cash flow problems for small builders and are found to be somewhat contentious in some cases, so common sense should be employed wherever possible in their use.
My experience has been that good quality documentation in the form of comprehensive construction drawings, specifications, schedules and a well drafted building contract remains the most important factor in avoiding disputes or misunderstandings at the end of a building project.
Construction contract law is very complex, so can be costly and time-consuming and it is generally a better option to continue with the completion of a building project regardless of any unresolved minor disputes.
