- Letters of the Law: 'R' is for Retention
- September 9, 2015
- Law Firm: DLA Piper (Canada) LLP - Vancouver Office
- Contractors in Qatar are usually required to stump up an enormous 30% of the contract sum in security to the employer. This is more onerous than in most jurisdictions, and reflects the buying power of the client but also the need to protect against the risk that comes from engaging foreign companies set up in Qatar with limited liability.
Typically: 10% is an advance payment bond; 10% a performance bond; 10% is retention.
Retention is a common feature of construction projects across the globe. The employer will usually hold on to, or retain, the agreed amount (say 10%) from each payment becoming due to the contractor throughout the project. The contractor will mirror the process, retaining the same percentage, from payments due to sub-contractors down the contractual chain.
Standard form building contracts and, indeed, standard practice in Qatar, is that half of the retention money is released on handover of the project (i.e. 5% of the contract sum in the example above) and the other half (the remaining 5% of the contract sum) on sign off of the maintenance/defect period. However, too often the release of retention is not prompt, with chasing and negotiating for payment of retention a familiar battle.
All parties would do well to remember that this money is security. The money has been earned by and belongs to the contractor (or sub-contractor if further down the contractual chain). The security is held in case any defects arise during the works or before the maintenance/defects period has ended and the contractor does not/cannot address those defects.
A common misuse of retention occurs where some works are outstanding at completion or handover of the project - the employer using this as justification to avoid releasing half of the retention money.
In fact, if the works are not complete, strictly, the corresponding value of those works should not have been certified or become due to the contractor in any event. If this is the case, then failing to release retention is a penalty rather than security.
Considering the value of retention can exceed the profit margins of contractors and sub-contractors, it is not difficult to see how cash flow problems arise throughout the contractual chain.
The contractor can plan for the retention but less so an unpredictable period of delay in its release. Where this has an impact on the flow down and release of retention further down the contractual chain, the problem compounds.
It is also not difficult to understand the employer's refusal to release retention in a timely manner, or applying the misuse of retention described above, becomes counterproductive. Inappropriate squeezing cash flow could result in contractors/sub-contractors being unable to fund remedial works.
A solution to the cash flow issue is to issue a retention bond allowing each interim payment to be made in full or on completion in exchange for release of all the retention monies held.
The contractor will have to pay a premium but the cash will be available and it removes the battle of chasing for release. In an ideal world, the bond would be expressed to only pay out only if the contractor has been afforded opportunity to rectify the works and has failed, to mirror the intention of retention, but more likely in this market you will see it termed "on demand."