International Construction Law Review
IS THERE A PLACE FOR RETENTION IN TODAY’S CONSTRUCTION INDUSTRY?*
Jeremy Coggins
Associate Professor, UniSA STEM, University of South Australia
Mitchell Francis
Associate, Corrs Chambers Westgarth
I. INTRODUCTION
Retention of cash from payments by principals to contractors, and by head contractors to their sub-contractors, has traditionally been and remains widely used as a form of security to guarantee the proper performance of construction works in the construction industry. Retention provisions in construction contracts typically provide that:1
(a) the principal is entitled to withhold an agreed percentage (typically, between 3 per cent and 10 per cent) from progress payments; and
(b) the principal shall release a proportion (typically 50 per cent) of withheld retention money at practical completion of the works with any remaining retention money released following the expiry of the contractually agreed defects liability period (DLP).
Retention provides a pool of readily accessible funds for principals to access if a contractor defaults on its contractual obligations – for example, where a contractor fails to rectify defective work or fails to complete works due to insolvency. As well as providing performance security to principals, the release of retention acts as an incentive for contractors to complete works expediently and honour their contractual obligation to rectify defective works during the DLP.
The practice of retaining a proportion of payments to contractors until completion of the works has its roots in the construction of the British railway system in the 1840s, when railway companies engaged many newly formed contracting entities that were often unable to perform successfully.2
* A paper based on that submitted to the Society of Construction Law Australia’s 2022 Brooking Prize.
1 See, e.g., FIDIC Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (“The Red Book”) (2nd Edition, 2017) clauses 14.3, 14.9; AS 4000–1997 General Conditions of Contract, clauses 5.1, 5.4; JCT Design and Build Contract 2016 (DB 2016), clause 14.8.
2 Bausman, D C, “Retainage Practice in the Construction Industry” (Foundation of the American Sub-contractors Association, November 2004).
Pt 2] Is There a Place for Retention in Today’s Construction Industry?
83