How Managing Contract Retention Can Save You Time and Money
April 20, 2021
In the world of construction, contract retention functions much like insurance for the client (often the owner or head contractor) — and an incentive for contractors and subcontractors — that work performed will meet the obligations agreed to in the contract. It also provides additional security against defects that are not remedied. While it may seem to weigh in favor of the client, it all comes down to how you manage the risks associated with retention. If you do it carefully using the right tools, it can even save you a bit of time and money in the end. Here’s how.
Adopt software that gives you more control over contract retention. Look for functionality to help you monitor and gain visibility into everything that ultimately impacts retention payments, such as:
- All outstanding retention your company may have, how much is owed (either to you or by you), and when it is due, so nothing is overlooked.
- A way to automatically calculate the appropriate amount of retention to withhold so there are no manual math errors or corrections after-the-fact.
- Obligations laid out in the contract to ensure project milestones are completed on time.
- The ability to track everyone’s responsibilities across different facets of the project for increased accountability and to automatically calculate their exposure if guarantees are missed.
- Contractor and subcontractor productivity so you can check progress and head off potential delays.
Have legal counsel review the entire contract, with extra attention paid to clauses like retention that might be detrimental to your financial solvency. This step can have a more profound effect on construction companies working on large-scale builds where the retention amount may be sizable, and the wait time for payment is far into the future. An attorney can review the contract and note if the retention clause violates state regulations on percentage limits and enforceability.
Negotiate the contract retention clause to a lower percentage or offer an alternative. Utilizing a retention bond or letter of credit may also be an option to eliminate the risk of delayed payments. Sometimes having a solid reputation and track record in the industry can make a client more comfortable honoring such a request. Even better, if you’ve worked with them on one or more projects that went well and you’ve developed a level of trust with each other, use that relationship and proven success as bargaining points when discussing the retention clause at the start of the project.
Get a few key project team members together for a post-mortem review. Each of you may have unique perspectives and insights on how different aspects of the project may have ultimately affected retention payments. Use this type of review to evaluate these and whatever other lessons may have been gained from the experience. Even if everything went off without a hitch, your answers and assessments will inform future contracts. The following discussion questions can help get you started off right.
- If things went well, what would you say are the key reasons why they might be repeated in future projects?
- Should the rate have been negotiated differently? If so, how can you introduce the conversation so neither side feels like they’re being taken advantage of?
- Might it have been possible to negotiate not having a retention clause at all? What would have been the potential alternatives, whether they were initially proposed or not?
- If retention payments seemed to take an excessively long time to pay out, should you look to negotiate the clause to say retention will be paid sooner, i.e., upon substantial completion rather than months after the defect liability phase? Would receiving a portion of the retention earlier have made a significant difference?
- Should closer attention have been paid to things that wound up affecting project milestones, which then impacted contract retention payments? If so, how can you be more proactive in mitigating these things? For example, could you loop in the owner early on for a collaborative approach to addressing issues that might compromise timely completion? Should you schedule more frequent inspections to find issues earlier? Was the project’s change management process and system up to the task?
- Were you held accountable for events beyond your control (weather, natural disasters) or that, per the contract, were not your responsibility (permit delays, client-directed change orders) that resulted in you not being able to collect retention?
- Look at the data you gathered during the build — things like schedule deviations, unforeseen issues, productivity curves. What do these and other metrics tell you? Could anything have been monitored better, corrected earlier or improved?
- Was communication with the owner open and productive? Could more trust have been fostered early on that would have made a difference in how the retention payout was handled?
When working with construction contracts, seemingly small details, such as a contract retention clause, can have long-term ramifications for contractors and subcontractors alike. Effectively managing them can help mitigate potential impacts on your business. The right software is the easiest, most effective way to do this. We’re happy to walk you through a demo to show you how InEight Contract can help you take control of contract retention — from creating the agreements, to administering the payments and ultimately, releasing.