A small business guide to retention in construction

0

Image source: Getty Images

Construction work is often a point of contention between construction companies and their clients. Here’s what you need to know about customer retention and how it could impact your business.

retention is nine letters long, but for many contractors it is a four letter word.

Withholding, where part of the payment to a contractor is withheld until the job is done, not only shows a lack of confidence in a contractor’s ability and trustworthiness, it can also create real financial difficulties for small businesses that do so need to pay bills.

However, developers argue that it is a necessary evil to protect them from projects going wrong.

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

Overview and history of retention

Withholding refers to monies earmarked for a construction project and withheld until the principal considers the work substantially completed and confirms that the contractor has performed the contract. It is designed to protect customer’s investment in case a construction project encounters major problems.

The practice began with the British railway system in the 1840s. The increasing demand for railroad construction led to a flood of new contractors, many of whom were inexperienced and posed a great financial risk to the railroad companies.

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

This practice effectively jeopardizes the contractor’s bottom line rather than the investor’s money, increases the incentive to do the project well, and discourages underbidding.

Today, retention is a common tool to reduce risk for developers, especially on large and complex projects where risks are higher.

Retention vs. Retention: What’s the Difference?

In construction the conditions retention and retention are mostly used synonymously. In some cases, however, there is a slight difference: the construction retention may refer specifically to the money withheld, while the retention refers to the act itself.

But even in this case, both terms essentially refer to the same thing.

How retention works in construction management

Storage is uncomplicated. Example: A customer hires a contractor to construct a 20,000 square foot office building at $200 per square foot or $4 million total. The contract includes a 5% deductible agreement.

The client will pay the contractor $3.8 million to complete the work and withhold $200,000 as a withholding. This retention is released once the project is completed and signed off by the client.

How does the retention affect contractors and subcontractors?

Withholding protects customers but can create difficulties for contractors or subcontractors who may have trouble paying their own invoices because they have to wait longer for payment to come through. Small builders don’t have deep pockets and have a higher chance of encountering financing problems.

Some contractors include the deductible as a cost in their quote, increasing the cost to customers and leading some to reduce or eliminate the deductible altogether. Some states have statutes that set a maximum deductible rate.

frequently asked Questions

  • Custody and retention fees differ depending on the type of job, the size of the project, and the client. For private jobs, you can generally expect an average deductible of 7.5%, while for state and federal jobs, fees are typically lower.

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

    There is no statewide federal law limiting retention rates, but some states have their own laws. For example, Alabama limits retention to 10% for private projects and 5% for public projects.

    Virginia does not impose a limit on withholding for private projects, but limits the withholding to 5% for public projects and allows contractors to place government contract monies over $200,000 in escrow.

    Only one state — New Mexico — prohibits the practice outright, although the law allows for a “final payment” of 5% to 10% of the total contract value, meaning the practice is functionally allowed under a different condition.

  • Typically, the client releases the money when the project is “substantially complete.” What that means depends on the contract you have with the customer. Some developers keep the money long after the project is complete if the contract allows them to.

    Carefully review each contract you sign with a customer to ensure it clearly defines what parameters must be met for the deductible to be released – and make sure you agree with that definition.

  • Many factors go into customer retention, from your reputation to your relationship with the customer to the size of the project.

    For example, if your construction company went over budget with a client in the past and this time you are working on a much larger and more complex project for that client, you are more likely to face a high retention fee.

  • It is possible if your contract allows it. If so, maybe you need to bite the bullet and next time decide to carefully review the contract and set clear terms about what parameters you need to meet in order for the funds to be released.

    If you have done this and believe the client is withholding funds in breach of contract, contact a contract law attorney to review your case.

  • If you’re a subcontractor for a Prime and you’ve got your job done, you may feel like you’re entitled to all the withholding claims even if the Prime isn’t finished with yours.

    In some cases, Primes are allowed to withhold subcontractor retention until the entire project is complete, but industry practices vary and much depends on how the contract is written. Have a lawyer review your contract if you are unsure.

  • Filing a lien is an effective way to collect debts as it establishes a claim on the debtor’s property. As such, it can be a good option for contractors who want to get their retentions paid out when clients slack off.

    Find out about state laws on lien filing deadlines so you don’t miss yours. Laws on filing liens vary widely from state to state, so consult an attorney first.

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

    The American Subcontractors Association (ASA) calls the deductible system “increasingly unfair and counterproductive” and supports the elimination of “unnecessary deductibles” on construction projects, as well as legislation that would prohibit a prime contractor from withholding a higher percentage from subcontractors than its own deductible.

    In addition, ASA supports legislation that would put funds in an escrow account with accruing interest, so subcontractors would receive a bonus that would increase the longer the funds were held.

Software can help deal with retention

If you are involved in construction project management, it is helpful to manage your relationships with clients through construction management software.

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

A construction management software can also do many other things for your business such as: B. Create a daily construction report, organize construction plans and track offers.

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

Share.

Comments are closed.