Retention Bonds Rip Off or Value for Money?

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Retention Bonds Rip Off or Value for Money?

What are retention bonds?

A retention bond is an agreement between a Specialist contractor (sub contractor), its contractor/client and a surety provider. Retention bonds are used to promote cash flow to the specialist contractor but also provide comfort to the contractor/client that the specialist contractor shall carry out their responsibilities throughout the defects liability period.

The NSCC (National Specialist Contractors Council) now Build UK  summed it up neatly – “a Retention bond is a win-win; the contractor has the monetary protection it requires and the Specialist Contractor keeps hold of its cash”

Since the Banwell Report in 1964 there have been sections of the construction industry trying to eradicate the use of retentions. Some 48 years later and retentions are still prevalent in all forms of contracts. Government projects have taken heed of the Latham report and have included the use of retention bonds.

A retention bond will cost the company money. The cost depends on the value of the retention and the financial standing of the specialist contractor. For example, retention of £20,000 and a financial secure company the cost of the retention bond would approximately be £800. This direct cost affects the profit margin for the project, unless you include the cost within your tender price.

Is this value for money?

The £20,000 would be in the account of the specialist contractor at the end of the project. The specialist contractor would not have to wait 12/24 months till the money is received. Not to generalise all contractors/clients but in my experience not once has the retention monies been released exactly 12 months from practical completion. It will inevitably involve numerous phone calls, emails, and letters from both the surveying department and the accounts department.

Constant dismissals from the contractor claiming, whether true or not, that they have not received the making good certificate from the architect irrelevant that our works are working correctly. There could be a roof leak, electrics not working, air conditioning not working, all very important to the end user but bare no relation to our works. Why should we be penalised for the defective work of others.

As the specialist contractor we have no direct link to the architect, and it is considered unethical practice to contact the architect to request whether they have issued the making good certificate, but how else are we to find out whether it has been received or not.

To stop the use of retentions in the long term can only be achieved I feel, by the contract companies, JCT in particular. If we can remove it from source we can remove it from the construction industry. However until that day arrives we will still benefit from using retention bonds and with the help and promotion by the NSCC and their Fair Payment Campaign alongside Surety & Bond this archaic practice could well and truly be a thing of the past.

Feel free to contact us if you want to find out more.