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Retentions - How to release the money to aid cashflow

Retention Bonds.

There is much debate currently about the use of Retentions in Construction, a retention of 5% is common in most contracts and is there to ensure that the works are completed to a satisfactory standard prior to release.

However, many Sub-Contractors view there use more negatively, some view as a hidden tax on subbies and others simply reside to the fact that they will never get the retention released in full without drawn out negotiations, with un-necessary, un-productive, futile management of time.

In a LinkedIn group ‘Retention Reform’ they estimate that there is some £5 Billion of Retentions being held at present in UK Construction.

According to the studies done by Retention Reform the top 5 most regular moans and groans from Sub Contractors about seeking the payment of retention are:

  1. the quantity surveyor working on the project account has left the business.
  2. no one in accounts knows anything about the job.
  3. the only person who speaks to me is from customer care and they say it is not due.
  4. when someone finally spoke to me they needed to check the account.
  5. customer care sent an email and are going to charge me if I don’t attend to some snagging.

So What Can Be Done!

The solution is a Retention Bond!

In certain contracts the employer may request that they hold up to 5% of the contract value (a retention) for a period of up to 12 months. You will then have to wait for the funds to be returned at the end of the making good of defect period, this can affect your cash-flow, however we can offer an alternative solution in the form of a Retention Bond.

A retention bond will provide the employer with the same level of comfort as the retention but freeing up the money and returning the money to your account.

The placement of bonds through the surety market, as alternatives to bank guarantees is most common and can help companies by keeping bank facilities available to meet cash flow requirements.

While there is a cost to supplying a Retention Bond, the cost is less than the retention and avoids the conflict and time a contractor would need to dedicate to recovering this, additionally the money is never retained so will aid cash flow and ultimately can make the tender more competitive in turn.

There is much talk about reforming the industry and the use of retentions, some options include the retention being held by an independent third party, however government have yet to make decisive action, but this route would still impact cash flow where a bond will aid the contractors financial position.

It is clear reform is a popular topic with 86% subcontractors in a recent poll stating the industry needs to review the process however Retention Bonds are little known and understood by Sub-Contractors and while reforms may be under consideration by government and other industry leaders there is a solution already available.

For more information on the subject please call now to speak to one of our specialist Bond Brokers – 02476 017646

Retention Bonds - Surety Bonds and Guarantees

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