Jacob Austin 00:00:09 Hi All Jacob Austin here, owner of QS.Zone and welcome to the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode it's all about retentions. We touched on retentions when we were discussing payments in episode five, but it really is a subject that can cause a lot of heartache and pain to a lot of people. So I wanted to do a more in-depth episode on this. So what is a retention? So it's a small percentage, typically between one and a half to 5%, which is held back from the payment of completed work on a project. So that money is stopped from the contractor downstream from the client under the main contract, and that same percentage is supposed to be cascaded down to the subcontractor under their subcontracts, so that money accumulates during the life of the project. And then it's paid down to the old party in two stages after the work is complete. So there's various ways in which that can be achieved.
Jacob Austin 00:01:22 The most common is the split 5050 between practical completion and making good of defects. But you've also got partial possessions or sectional completions. And it may be the case that 50% of the retention for each section or completion could be released on finishing that section, and then the same when the making good of defects of that section comes around. Or if you're working on a housing project, something with individual dwellings, rooms, apartments, retentions might be released with the partial possession of a plot. I think the principle has been around since the dawn of time. As far as contracting is concerned, and the principal being that there's these little bits of defect or tiny issues, snags, if you like, that arise throughout the construction of the job. And rather than administer minute adjustments for these little bits of work as and when the issues arise. This sort of global percentage is held back to sort of keep the contractors interest and the subcontractors interest in putting those bits of work, right. And I mentioned this before. There was a study by Turner and Townsend in 2021 that showed the UK construction sector had the lowest margins in the world, at just 3.9%.
Jacob Austin 00:02:49 And Construction News had a similar study in 2019, which showed a profit margin of 2.6% Across the top 100 construction firms in the UK. Actually, at that time, the top 10% of UK contractors were running a loss on average of -0.1%. So when I'm talking about retentions being a necessity from a contractor's point of view, that really is the case. And what you're likely to find is that the companies that were making more money had some strategy of reinvesting the cash flow, whereas others didn't, and the margins are ridiculously low. So stopping the retention is just something that needs to be done to keep the contractor in the black. And we'll talk about some of the issues of contractors holding on to retention for longer than they should. But for me, it starts right at the top. The client wants some kind of surety that the job's going to get finished properly, and that the contractor is going to come back and make good any defects during the liability period. So they stop this percentage And then that cascades downstream.
Jacob Austin 00:04:01 But the contract is in this situation where they haven't really done the work. Their supply chain has done it on their behalf. They've got all of these mouths to feed in terms of cascading that retention down. But when it gets to the defects liability period, the client may well be sat there holding on to a global 2.5% of the whole job cost or whole job price because of one little niggle on one subcontractors piece of work. So let's say the access control button to let you out of the building is sticking. And okay, it's a bit of an issue. It's not worth a lot of money, but the client has the opportunity to hold on to 2.5% of the multi-million pound contract, some for the sake of half a day's work. If that and the price of a switch. And there's also a situation where some clients in their building managers, their estates team, whoever it is that's handling the sign off of the defects, period. They're just really hard to get hold of. Or in the case of some housing jobs.
Jacob Austin 00:05:04 You know, you've got some defects to correct, but the tenants on occasion show no interest in giving you access to complete it. I'm not trying to say that makes the holding of any retentions for a long period of time, right? All I'm trying to do is point out that it might not be quite as black and white as you think it is, and it's quite easy for the subcontractors out there to go to the big, bad main contractor. You're holding my money and you don't want to pay it. But going back to the point on the margin, it really is a case of unless that retention gets held, the contractor really hasn't made any money for a significant period of time, and there's all manner of portions of the job that are not subject to retention downstream. But the main contract doesn't discern those sections and the percentage is held regardless. There you go. I'll put my main contractors Tractor's violin back in the box now and we'll talk about some of the issues. Issue number one is the retention percentage itself.
Jacob Austin 00:06:03 Now, as you are subcontracting, the retention percentage from the main contract is typically cascaded down into the subcontract. But there are instances where the contractor will try and increase the percentage to improve his cash flow position. Those percentages should be one and the same. And when you receive an inquiry, it should be clear what the main contract conditions are and particularly information such as the key dates, the retention percentage, the start and finish date of the main contract. It should all be communicated out to you at the point of pricing the job. So item number one is to make sure that those percentages are aligned and the same. And here's one to watch out for. If you're working on a JCT contract and you've got a JCT subcontract in front of you, if the retention percentage is left blank. It defaults to 3%. So just be aware that if you're looking at that retention clause and there's no percentage noted, 3% will be deducted. And it's not a statement that says that the retention is nil. If the intention is to have a nil retention, it needs to say 0%.
Jacob Austin 00:07:17 So that's one to bear in mind and watch out for and not to get caught out by. Contrastingly, if you're working on an NEC project, there is no applicable minimum or no default minimum in the contract. So in the case of an NEC contract, the retention percentage has to be explicitly stated. So when is it supposed to be released? The idea is that when practical completion is achieved, your first moiety or your first half of retention is due for release. So to get your hands on that first half of retention, what you ought to be doing best practice wise is making sure that your works are snag free as you proceed. And that's not to say that you won't miss the odd thing, but you should be snagging the works as you go. And that means dealing with any patent defects and patent being patently obvious things that can be seen and dealt with right away. These should be mopped up as you go. And avoiding a long list of outstanding items when you get to finishing time. And this is really your incentive to do that.
Jacob Austin 00:08:25 Once you have completed your snags and your work is defect free, get a practical completion statement. Now, some contractors don't typically issue those for subcontractors, so I wouldn't be fully surprised if that was the case that you ask for a practical completion certificate. And the contractor says, what the fuck do you want one of those for? But this is an item that you really need to take charge of because you've got an important cut off point there to say that your work is as complete as it can be, and you've got no further liability. You effectively passing ownership and ceasing any ongoing requirement to ensure. And you're also critically confirming a date when you finished so that in 12 months time you've got a clear marker in the sand to say, this is when I finish the job and now my retention is due. I'm mentioning 12 months. 12 months is pretty standard, but there are instances and some clients are getting wiser to some of them where the client, for their own benefit, is requesting a longer period of retention and a longer making good defects.
Jacob Austin 00:09:35 Period. And they're citing things such as the seasonal commissioning of the mechanical and electrical system as a reason to hold on to money for even longer. So again, that period is defined in the main contract, and it's defined in your subcontract. And the two periods ought to really be aligned. Okay, but usually the two things are fairly closely aligned. And it's during that defects liability period that you effectively have to warrant your work. And in the instance of some urgent defects, there may well be a period that you've got to attend site and deal with it. And those things might be a serious water leak and not so serious water leak, doors not working. Some kind of system failure that materially affects how the building performs. And in those instances, you'd expect to be notified fairly swiftly, and you will need to be on hand to deal with the issue fairly swiftly as well. But mostly, nothing major crops up. And at the end of the defects liability period, there will be a joint inspection between the contractor and the client.
Jacob Austin 00:10:47 And they go around and generate a list of minor defects that have occurred. The contractor then takes that away and disseminates it out to the supply chain. Then it becomes the responsibility of each of the subcontractors to discharge the defects in their own work. Now, one thing that you should be aware of is the pay when paid mechanism in the Construction Act. And what that is effectively there for is to say that there is no longer allowed to be any link between the main contract defect completion and the subcontract defect completion. So that means that regardless of whether the contractor is completed their defects and whether their retention is due from the main contract and the client, your retention becomes due on the date set out. So in your contract particulars you've got a period called your subcontract defect liability period. And what you're going to do is add that period to the date that practical completion was achieved. So now you can see the importance of having that defect defined even date on a piece of paper. I your practical completion statement. There is a slight alternative to that and some subcontracts.
Jacob Austin 00:12:03 The defects liability ceases on a given date, and that date is written out in your subcontract, and that avoids any confusion over when your attention is due. You can have a little watch out for statements in your subcontract which say the later of and then giving you a defects liability period and a date. And then what's trying to happen there is the contractor is trying to hedge his bets and say, you can have your attention when you're finished, but if you finish too early, then I'm knocking it back a bit. One thing that can be a problem is the setting of particularly long dates by the main contractor for the defects liability periods downstream. So as I mentioned before, you should be getting details of the main contract as either part of your inquiry pack or as a statement in your subcontract to say, these are what the details are. I've got sympathy on both sides of the argument on this because as a main contractor say we're looking at brickwork. That's part of the build to get the project up to watertight.
Jacob Austin 00:13:11 And there may well be a significant programme of works to follow, including internal partitions, decoration, mechanical and electrical works. Specific items of fitout such as kitchens, furniture, even the builder's clean will take some time and what they don't want to be is in a situation where they've set your finish date for your defects liability period, significantly ahead of when they're going to conclude their own liability period. Because what you effectively will have is a situation where your liability period is finished, but the contractor remains liable to the client upstream, and all of a sudden they're in a situation where they're technically liable to pay you for completing defects, that they've got no hope of recovering from the client. So the reasons for elongating are subcontractors, defects, liability period to me are fairly clear, but it's got to be done in a reasonable fashion because on the flip side, you might have finished your work a year ahead of the main contract finishing, and you're basically sat there with a large chunk of your profit outstanding for that extra year beyond when you would have finished the work.
Jacob Austin 00:14:29 So it's then a question of what can you do about that? And it might be a case where you incentivize the contractor. You give half a percent of discount to be able to do away with the retention altogether. Or it might be you agree on a bond as an alternative to retention. Certain trades have a guarantee, an example of that being the layer guarantee for the lift and escalator industry. So there are precedents there for other things, but I would be wary of insisting upon no retention at all, because unless you've got a long standing working relationship with a contractor, you're only just giving them a reason to put your tender to the bottom of the pile. It is worth trying to negotiate some middle ground, and there can usually be some kind of happy medium agreed upon the use of a bond where a bank or insurer underwrites the retention, achieves a situation where the contractor gets their liability covered. And if, for whatever reason, there's a situation where the subcontractor fails to complete their defects, then the bank or the insurer pays the contractor for the completion, and then they go after recovering that money from the Sube.
Jacob Austin 00:15:43 Collecting your retention might not be a top priority for you. And when you're faced with a live construction job that you've got to manage your organized materials for, make sure the labor is turning up on time, monitor the progress, and administer all of your payments. For it's one of the plates that it's hard to keep spinning. Certainly, the delivery of current work is likely to be priority number one, but without chasing the money that is due to you, you're effectively leaving a cash flow hole that isn't going to get any better until you do something about it. So let's just put it into perspective for a second. When you think about your net profit after overheads, if it's anywhere in the region of some of the subcontractors I've dealt with in the past, it could be around 3 to 5%. Coincidentally, that retention percentage between 3 to 5% may well be sucking away most of the profit that you're making out of a job. So this really needs to be an area of Your focus. And when you think about it in those terms, that what you're really doing is chasing your profit.
Jacob Austin 00:16:53 Your only bit of profit that you're going to make out of a job. And it needs to be a case of you're putting attention in the right place. Refocus that telescope on your goal of making money and prioritize getting your profit. Depending on the size of your organization. That might mean setting aside some of your own time, a regular one day slot per month or half a day. Whatever's appropriate. Diaries. It put it aside clearly, mark it for chasing retentions and focus during that time on doing it. Or you delegate the task and make sure it's followed through on to somebody within your team that you can trust to collect money. And that person needs to be aware enough of their rights and persistent enough to get the job done. So what do you do if you're struggling to get paid? Check out your subcontract and once you've achieved the triggers that are set out in your contract. Make sure you get your application in for your attention. If the money isn't forthcoming, technically the contractor is in breach of contract.
Jacob Austin 00:17:57 So the remedies there are much like the remedies for nonpayment. Once you can establish that the payment is due, you've got your right to be paid in the same time scale as any other application. So chase your payment up in the normal fashion, and bear in mind you might need to escalate things to one of the key decision makers in the business you're working for. So that might be a commercial manager or commercial director, an MD. If you can show that you've made a significant number of chases and you've not received the payment, that can be a really effective way of stirring up some action. If that kind of pressure isn't working, you may need to issue a notice in the same fashion that we discussed on the payments episode, and you may, unfortunately have to go down the route of debt recovery. The first portion of retention isn't often a source of frustration. It's more the second portion of retention that can be the subject of delays and issues. So this is something you really need to monitor and stay on top of.
Jacob Austin 00:19:01 So you really want to create yourself a straightforward and easy to maintain system of monitoring what retention will be due and when. It's up to you how complex you make it. It might well be as simple as an Excel spreadsheet with a list of contract names, amounts, and dates. It might be that you want to set key reminders up in a calendar, or if you've got quite a sophisticated system, it may well notify you itself. But my advice to you would be however you decide to do it. Make it simple. Make it easy to maintain. And basically the onus is on you to action it when the time is right. So, because the main contractor will have their liability to the client upstream, Stream. It will create this situation where there's some reluctance for them to pay out until their defects liability is fully discharged themselves. So I remind you that the Construction Act prohibits the linking of the main contract to the subcontract in that way, and that really, once your defects liability period is up, you should be paid the money.
Jacob Austin 00:20:08 But to me, there's a degree of pragmatism required here because you need to get back to site if you have any defects of your own and make sure that they're rectified. And you've got to remember that all of the work is going to be inspected at the same time. So that's each and every trade involved in the job. And just remember that this is a bit of a team effort. The whole of the subcontract supply chain is likely in the same boat as you. And if one of you is letting the side down, you're probably going to be hurting 2030 subcontractors who are all waiting for their slice of retention as well. Also, this is a chance for you to really show your best side and demonstrate the service that you can offer to put yourself in a good light for the next job. And that is important because basically, you don't want to give the contractor any undue reason or further excuse not to pay the retention out when the defects are closed out. This is much the same as chasing any other payment.
Jacob Austin 00:21:06 And remember the escalation points that we mentioned earlier in the episode. Now to me, there's more to be done on retention, because out there in some other countries in Europe and the likes of Australia and the USA, there is such a thing as a retention trust account, which at the same time as a payment being certified to a subcontractor, the right proportion of retention is paid into this trust account and held there and at the relevant point that money is then able to be released. And that really seems like a fair solution because everybody is then protected from the situation. The contractor doesn't have control of that money, and in the event of them going bust, it's still there in the trust account and it's guaranteed to be paid out to the subbies. But of course, when a contractor goes bust, there's a whole long list of creditors. And if some of those are banks and the likes, they aren't supporting the idea of a trust account because that then makes their credit or interest further down the pecking order than the subcontractor who's got their amount held in a trust account.
Jacob Austin 00:22:15 So as with all of these things, there's a bit of a mixed bag when it comes to support, and I really think that something should be done on this. There should be a campaign because the SME contractors that are doing the bulk of the work are the ones that need the most protection, not liquidators, administrators and banks in that situation. There's also something else that's interesting that you can have a look at, which is a fair payment charter. So it's backed by the government. And the ultimate goal of that is to get all companies paid within 30 days. And there is a push to get to a zero retention position. Some of the big boy contractors out there are signed up to it. In fact, most of the big names are. It's quite interesting. If you go on the Gov.uk website and you search for fair payment charter, you can actually download a report on the various tier one main contractors out there, which tells you how many payments were made or what percentage of payments were made within 30 days.
Jacob Austin 00:23:21 The same again for 31 to 61 days, and so on. And it also gives you an average period in which debts are settled or payments are made. So you can look at that with some interest and see whether the companies that you're working for are doing the right thing. And it's interesting information for you to have a look at. Consider whether you want to work for a company that pays their salaries on time, and whether the organization you're working for is sticking to their word or not. And one final thought on this, which is a practice that I don't really want to encourage, but nevertheless, it is something that I've heard of going on, which is building in retention as a cost when you're estimating a job. For me, that doesn't solve the problem. It's just accepting something that isn't correct and almost sort of condoning it. Because if you're pricing in retention, you're basically you're there writing it off from the start and accepting that you're not going to get paid it. And you're sort of giving the main contractor the encouragement to do it, particularly if you then don't chase it up.
Jacob Austin 00:24:30 Now, if you were to price it in and see it as a bit of a bonus item, you've priced some extra risk of recovering the retention as a bit of an added upside that you can go and chase down at a later date for some extra profit. Then I can sort of see that a little bit more. But again, we're in a situation where we're then increasing the price, particularly when we're dealing with public money, working for a school or not. If you're increasing your price, you're effectively costing yourself and the taxpayers out there, or for the sake of giving the contractor an easy route out and letting him off the hook for something he should be paying you in the first place. One thing that I've seen work quite well, particularly if you've got a decent ongoing relationship with the contractor, is the usual retention cap. Now everybody is sort of happy with the retention cap, if you like, principally because it doesn't do anything about the cash flow problem that retention is cause. But if you've got a decent working relationship and there's some aspirations to keep on trading with each other, there's business ongoing between two companies.
Jacob Austin 00:25:41 For a period of many years. Once you've got that trust, their retention cap at that point would be really effective. And what that then does is gives you the benefit of an increased bit of cash flow, whilst it allows the contract to some security in that there is a bit of money to keep your interest there. In the case of there being defects, and it's at a level that you can both feel comfortable with, this sort of thing sits outside of the realms of a typical subcontract, and it's something that you'd have to negotiate on an individual basis. And just bear in mind that if you reduce the contractor's comfort level by capping your attention, if that cap is too low, you might end up in a situation where you're inviting more scrutiny onto your work because they don't have that fund that monetary safety blanket to put right issues. So as ever, there are pros and cons to each approach. So that about sums up everything I want to say on retentions for one day. There's probably more to add because it is one of those unilateral bugbears of the industry.
Jacob Austin 00:26:50 I'd love to hear your stories on retentions. Everybody's got one shout at me on any of your favourite socials at QS.Zone, and thanks for tuning in to today's show. If you like what you've heard and you want to learn more, please find us at. Where you can subscribe to our training and support system for like minded subcontractors. In there you'll find templates, how to videos, interviews, and more. It's less than the price of a cup of coffee per day, and you can cancel any time. We're also on all your favourite socials at @QS.Zone. Thanks again! I've been Jacob Austin and you've been awesome!
