People hold on

here are few businesses with ambitions to stay solvent that are prepared to deliver their product without any guarantee of payment. If credit is allowed, the supplier usually needs to be satisfied as to the purchaser's financial credentials.

The construction industry operates by a different method. Contractors and subcontractors spend large sums of money on mobilisation, undertake a month's work and often have to wait for another month at least for payment. Employers and main contractors provide nothing in the way of bonds, parent company guarantees, letters of credit or any other form of security. The contractor and subcontractors with tens of thousands of pounds at risk must operate on a trust basis.

To make matters worse, retention is withheld and is not paid for months, and in some cases years, after the work has been completed. Insolvency of the employer or main contractor can add to the financial risk.

Holding a fund, employers say, is the only way of ensuring that any defects are corrected. If the contractor or subcontractors do not correct the defects, then the retention fund will be available to pay others to carry out the work.

Standard form approach
The various standard forms of contract tend to deal with retention in different ways. The ICE conditions are reasonably straightforward. A percentage of the amount certified is deducted up to a recommended maximum of 5%. A limit on the total amount deducted is recommended as 3% of the total tender price. There is provision for including a different percentage in respect of goods and materials delivered to site but unfixed; usually this is higher than that applied to workmanship and materials.

The JCT conditions are also simple in their approach: under main contracts and standard subcontracts 5%, or a lower sum if so specified, is deducted from all money certified.

In an effort to protect the contractor and nominated subcontractors from losing the retention in the event of the employer's insolvency, the JCT conditions state that the employer holds the retention in trust for the contractor and nominated subcontractors.

It goes further by providing that the retention money is to be placed in a separate bank account if requested by the contractor or any nominated subcontractor. In the event of insolvency on the part of the employer, the receiver would be obliged to pay the contractor and nominated subcontractor the amount of the retention in full. The main drawback is that employers rarely place retention in a separate account and in insolvency it cannot be traced.

It would not need too much of a change of attitude on the part of employers to accept a bond in preference to retentions

The subcontractor's tale
Subcontractors are often in an even worse position than the main contractor. Their work will often have been completed long before that of the main contractor. None the less, the subcontractor has to wait until the retention has been released under the main contract before payment is made under the subcontract.

Subcontractors complain that in most cases they have to wait years after they have completed their own defects before the second half of the retention is released to them. This is because, while their defects may have been completed, others have not been so diligent.

Need for a rethink
The profits made by contractors and subcontractors in terms of percentage of turnover are usually very modest. Companies who manage to make two or three percent are regarded as successful. Retention of up to 5%, when looked at in terms of the profitability, is easily seen as having a significant effect on a company's financial situation. It seems appropriate for a more equitable arrangement which will protect the employer's position and, at the same time, free up money for the contractor and subcontractors.

There has been some talk in the industry about the possibility of a retention bond. The recently published revised FIDIC conditions, which are widely used on international contracts, go some way to addressing the situation. Appendix F gives an example of a retention money guarantee. This is intended to provide the employer with security for early release of retention.

Piling and structural steel specialists are also using a standard form of insurance-backed bond that is proving a successful alternative.

It would not need too much of a change of attitude on the part of employers to accept a bond in preference to the deduction of retention. Unfortunately, some employers see retention as a means of enhancing their cash flow. In calculating their borrowing needs, employers often take into account the large deposits of retention money in their hands at any one time.

The Government is taking a lead through the Office of Government Commerce, which is carrying out a review with the intention of stamping out retention. Unfortunately, this seems in conflict with the expressed intentions of the construction minister Nick Raynsford who has ruled out the abolition of retention.