Understanding Retentions
Retentions serve as a form of security in the construction industry, ensuring that contractors fulfill all their contractual obligations. These may include rectifying any defects or deficiencies in their work. Typically, around 5% to 10% of the contract value is held back throughout the construction project. These retained funds are usually released upon project completion, final inspection, and fulfillment of all contractual obligations.
After the project is completed, there’s usually a defect liability period. During this period, the client retains a portion of the contract payment against any potential defects or issues that may arise. The release of these funds depends on terms and conditions specified in the contract and typically requires a formal process such as issuing a certificate of completion or satisfaction of contractual requirements.
But remember, retentions can significantly affect your cash flow, especially if you’re a smaller business. You might have to wait until the end of the project or even longer to receive the retained amount, impacting the cash flow of the project and potentially it’s profitability. Business concerns over retentions are so widespread, there have even been Government consultations and papers on it.
The Need to Challenge Retentions
Now, let’s shift gears and ask ourselves… Why do we have to accept this as a given? Can we not push back on it?
Why not say, no, we’re not prepared to put in a retention, we’re not going to accept you holding on to our money for months on end? The notion of questioning and challenging the acceptance of retentions could serve as the first step towards more proactive financial management.
Handling Retentions Effectively
If avoiding retention isn’t feasible, here are 3 ways to handle them more effectively:
- The first is clarity. Be clear on what you need to do to release that retention. Document it and have it clear as day. This and this has to happen for the release – as simple as that.
- The next key aspect is tracking. Don’t just put the retention out of your mind once it’s in place. Retentions should be recorded, tracked, and followed up on, not just when they’re due, but well in advance. Remember, this isn’t some favour you’re asking for – this is your cash! It should be treated with the same seriousness as any other receivable.
- Lastly, be proactive. Don’t wait for the due date to spring upon you. Instead, start the follow-up process 4-6 weeks before the due date. That way, you’re on the front foot, making sure everything’s ready for the release of the retention.
Use Assertive Financial Management
The world of construction business isn’t just about bricks and mortar, it’s about assertive financial management as well. Rethink retentions, question their acceptance, and explore the potential of assertive negotiations around them.
Remember, retentions are essentially your money. Make sure you have a robust system to track and collect them. Your financial health depends on it. Don’t just survive in the industry, thrive with informed decision-making and proactive measures.
Make the shift today!
Managing your retentions is just one of the areas we cover in our KYN Mastery Group. Join us and learn how to let your business thrive!
