In the world of construction, project success depends not only on completing the work but also ensuring you meet the desired quality standards. This is where the concept of retention comes in.
Essentially retention is a fixed percentage of the total payment due for a contract, withheld from each progress claim and not paid until the project is complete.
It is often included in construction contracts to serve as a financial safeguard, ensuring that the head contractor or subcontractor delivers on their promises and upholds the agreed-upon quality of work.
In this article, we will explore the concept of retention in construction, explain how it works and provide some valuable insights on how to manage its impact to ensure successful project outcomes. Let’s get started!
Retention in construction is a financial security usually held by the principal against the head contractor and by the head contractor against subcontractors.
It is used in the construction industry for two reasons:
In construction contracts, retention is usually set at 5% of the total contract value. Meaning that each time you submit a monthly progress claim, 5% will be withheld from your receivable invoice.
For example, if you were to submit a $100,000 progress claim, the principal or head contractor will retain $5,000, and you will be paid $95,000.
This happens every time you submit a progress claim. So, if you were working on a $1,000,000 contract, you would have a total of $50,000 held back as retention throughout the project.
This money won’t be paid to you until the project reaches two key stages:
Of course, the idea of retention sounds simple in theory, but too often, the practice is abused. We’re talking funds not being released, regulations being ignored and serious cash flow issues. Definitely not cool!
But hey, don’t dwell on it — we’ve got some tips that’ll help you manage your retention like a pro.
Retention can often represent your entire profit margin on a job. So, getting it right is absolutely crucial. Here are 3 tips to help:
Planning your cash flow is a way of looking into the future. With money coming in and out at different stages of your projects, having a cash flow forecast is pivotal.
It will help you identify the best times to spend your cash and the best times to save it by looking at your cash-in and cash-out timeline.
By anticipating cashflow shortages, you will be able to take pre-emptive actions to ensure you always have the required working capital, such as getting an overdraft from the bank.
Embracing technology can significantly streamline your retention management process.
With project management software, you can easily calculate retention amounts on your head and subcontractor claims, monitor the release of retention funds and maintain accurate records of all financial transactions.
That’s right! Project management software will simplify the entire retention and progress claims process based on your contract terms.
With just a few clicks, you can generate accurate retention amounts, eliminating the need for manual calculations and reducing your administrative burden. That’s helpful!
One of the most simple and effective ways to manage the impact of retention in construction is to consistently deliver high-quality work.
By maintaining a focus on excellence throughout every phase of the construction process, you can minimise the risk of defects or incomplete work, which may lead to prolonged retention periods.
This involves closely monitoring the work progress, conducting regular quality checks and promptly addressing any issues that arise.
By upholding high work standards, you build a reputation for reliability, which can positively influence the release of retention funds.
Retention plays a crucial role in the construction industry as a financial safeguard to ensure project success and uphold quality standards.
By withholding a fixed percentage of the total payment until project completion, retention motivates contractors to fulfil their commitments and deliver on their promises.
Understanding how retention works and managing its impact is crucial when growing a successful construction business.
From planning your cash flow to utilising construction project management software, implementing the right strategies can help you mitigate the challenges of retention and optimise project outcomes.
At Lentune, we help construction companies streamline the way they handle project finances. Our clever project cost management software will help you calculate your retentions, manage your head and subcontractor claims and even save you hours each week. We’d love to show you how it works!
In a live demo, we can answer any questions and show you how Lentune could grow your business.