If you are a contractor or a subcontractor in the building & construction industry then you probably have Retention clauses in your contracts.

This means that as a contractor, your client will withhold a percentage of your claim and if you engage subcontractors then you will be deducting a similar percentage from the monies you pay them. The amounts deducted are termed RETENTIONS and their payment is delayed, with typically half paid after the Practical Completion Date and the remainder released after the Defects Liability Period has elapsed and then only if their workmanship is classified as satisfactory. Otherwise, some of the money will be used to bring the work up to "standard".

The Retention rates themselves can vary, but 5% is typical and this is a significant sum on a commercial development.

Its your "Fruit"

Retentions by their nature have an immediate effect upon cash-flow and if they are never released for payment then they will also impact the profit on the job and 5% of the contract value is a significant share of the profit margin. Even if you are satisfied with what you have received from the job to-date this money is "the fruit on the sideboard" and it should be on your "sideboard" not theirs.

What's the Date?

The payment of Retentions, as we have said, is linked to two key dates - when the project has achieved Practical Completion and when we have reached the End of Defects Liability period. So it's highly desirable for your accounting software to be "project date aware" then you can avoid becoming become one of the many Subcontractors who simply doesn't claim their Retentions.

Keeping Track of Retentions

Despite their significance, Retentions are often not recorded in the accounting software used by the business - instead they are "tracked" in a spreadsheet. Firms who are serious about their liquidity and profitability use specialised Construction Accounting Software which handles Retentions as part of the normal processing.

Contractors using general accounting software often have to use "workarounds" to handle Retentions. And in some accounting systems the Retentions can't be rolled over to the next financial year - which is a concern.

But either way, your software should record the Retention amount against the project and display it prominently in reports so it is not "forgotten". This means that Accounts Receivable Trial Balance and Management Reports should ideally have a separate Retentions column.

In a similar fashion the Retentions you withhold from your Subcontractors should be clearly identified as such on the Remittance Advices and for your benefit should be shown on Accounts Payable Reports because you need to be aware of this future liability.

In fact you really need an Project Payables Report - because the payments are due based on an invoice date plus 30 days - but rather when the project reaches milestones.

Calculating Retentions

If your software does handle Retentions and if you are a Contractor, then it's probably best that your software did calculate the Retention Amount automatically when you are preparing Progress Claims. Instead you can allow your Project Managers to calculate them to your advantage - not the clients. When it comes to calculating the Retentions for your subcontractors, then of course you want the software to calculate it accurately - not a Dollar more nor a Dollar less than what they are entitled to. But of course you hope that they forget to claim it later so it can be your "Fruit on the Sideboard".