A Small Business Guide to Retention in Construction

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Retention in construction is often a point of contention between construction companies and their clients. Here’s what you need to know about holdback and how it could affect your business.

Detention is nine letters, but for many entrepreneurs it is a four letter word.

Withholding, which involves withholding part of a contractor’s payment until the job is completed, not only shows a lack of confidence in a contractor’s abilities and reliability, but can also cause real financial hardship. to small businesses that need to pay bills.

However, the developers say it’s a necessary evil to protect them from projects going awry.

What exactly is retention and how can you manage it as a small business? This guide breaks down some of the most frequently asked questions about this practice.

Holdback Overview and History

Holdback refers to money scheduled for a construction project that is held back until the client deems the work to be substantially complete and confirms that the contractor has fulfilled the contract. It is intended to protect the client’s investment in the event that a construction project encounters major problems.

The practice began in the 1840s with the UK rail system. The increased demand for railway construction brought a flood of new contractors, many of whom were inexperienced and presented a great financial risk to the railway companies.

As a result, these companies began withholding up to 20% of payments to contractors until they were confident in the progress of the project.

This practice effectively jeopardizes the contractor’s profit rather than the investor’s money, increasing the incentive to execute the project well and discouraging underbidding.

Today, restraint is a common tool for reducing risk for developers, especially for complex, large-scale projects where the risks are higher.

Retention vs Retention: What’s the Difference?

In construction, the terms retention and detention are most often used interchangeably. However, in some cases there is a slight difference: withholding in construction may refer specifically to the money that is withheld, while withholding refers to the deed itself.

Even then, however, the two terms essentially refer to the same thing.

How Restraint Works in Construction Management

Restraint is simple. For example, a client hires a contractor to build a 20,000 square foot office building for $200 per square foot, or $4 million in total. The contract includes a 5% holdback agreement.

The client pays the contractor $3.8 million to complete the work and retains $200,000 as a holdback. This holdback is released once the project is completed and the customer approves it.

How does the holdback affect contractors and subcontractors?

The holdback protects customers, but it can create difficulties for contractors or subcontractors, who may find it difficult to pay their own bills because they have to wait longer to receive payment. Small construction companies do not have deep pockets and are more likely to encounter financing problems.

Some contractors include the holdback as a cost in their bid, which increases the cost to customers and induces some of them to reduce or eliminate the holdback altogether. Some states have laws setting a maximum withholding rate.

FAQs

  • Holdbacks and retention fees differ depending on the type of work, the size of the project and the client. For private jobs, you can typically expect an average retention of 7.5%, while state and federal jobs typically charge less than that.

  • For federal contracts, contracting officers are permitted to withhold up to 10% of payment on a case-by-case basis, but restrictions prevent contracting officers from withholding money arbitrarily.

    There is no national federal law limiting retention rates – however, some states have enacted their own laws. For example, Alabama limits the holdback to 10% for private projects and 5% for public projects.

    Virginia has no holdback limit for private projects, but does limit holdback to 5% for public projects and allows contractors to place withheld funds in an escrow account for public contracts over $200,000.

    Only one state – New Mexico – completely prohibits the practice, although the law allows a “closing payment” of 5% to 10% of the total contract value, meaning the practice is functionally permitted under a term different.

  • Usually the client releases the money when the project is “nearly done”. What this means depends on the contract you have signed with the customer. Some developers will keep money long after project completion if the contract allows.

    Carefully review any contract you sign with a customer to make sure it defines exactly what parameters must be met for the holdback to be released – and make sure you agree with that definition.

  • Many factors come into play, from your reputation to your relationship with the client to the size of the project.

    For example, if your construction company has already exceeded its budget with a client and you are working on a much larger and more complex project for this client this time around, it is more likely that you will incur high restraint.

  • It is possible, if your contract allows it. If so, you may have to bite the bullet and decide next time to review the contract carefully and have clear terms on what parameters you must meet for the funds to be released.

    If you have done so and you believe the customer is withholding funds in violation of the contract, contact a contract lawyer to review your case.

  • If you are a sub-contractor for a prime contractor and you have done your work, you may feel that you are entitled to the full retainage claims, even if the prime contractor has none. not yet finished with theirs.

    In some cases, prime contractors are permitted to withhold holdback from subcontractors until the entire project is complete, but industry practice varies and is very much dependent on how the contract is executed. written. Ask a lawyer to check your contract if you are unsure.

  • Filing a lien is an effective way to collect a debt because it creates a claim against the debtor’s assets. So it can be a good option for contractors looking to get their retainer paid when customers drag their feet.

    Check state laws on lien filing deadlines so you don’t miss yours. Laws governing the filing of liens for retentions vary widely from state to state, so consult an attorney first.

  • Not surprisingly, this practice is not popular with contractors and subcontractors, as it places a financial burden on them.

    The American Subcontractors Association (ASA) calls the holdback system “increasingly unfair and counterproductive” and supports the elimination of “unnecessary holdbacks” on construction projects as well as legislation that would prohibit a prime contractor to retain a higher percentage of subcontractors than its own retention rate.

    Additionally, ASA supports legislation that would escrow funds with accrued interest, so contractors would receive a bonus that would increase as funds are held.

Software can help you manage deductions

When you are in the management of construction projects, it is useful to manage your relationships with customers through construction management software.

The Ascent has reviewed a number of top platforms that will help you manage construction documents and keep up to date with all your agreements and contracts.

Construction management software can also do a lot of other things for your business, like giving you a daily construction report, organizing plans, and tracking bids.

Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. Consult an attorney before taking any of the actions described in this article.

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