Learn the retention formula and use it to keep from hiring new employees all the time

Retention money meaning formula and examples

Retention is security that is held by a procuring contractor to guarantee the performance of the supplying contractor and safeguard against the defects in case the supplying contractor fails to satisfy them. This security is in the form of cash but is often substituted for a bank guarantee or an insurance bond. Retention money is normally set at 5% of the value of the works and applies to both the Head Contractor and the subcontractor. The percentage is deducted from all of the interim payments made to the head contractor from its employer and in turn, deducts it from all the subcontractors.

How do you collect the retention money?

It is important for both the head contractors and subcontractors to have automated systems in place to ensure that you make and receive appropriate written notifications at the time of completion and expiration of the defects liability period. The automated service will help in:

  • Notifying the date of practical completion on your part of the works immediately they are completed.
  • Record the date of practical completion and remind you that you have reached the end of defects liability period.
  • Request in writing the release of retention which is in the form of claim for practical completion and after defects remediation which is the claim for completion.
  • Stay up to date on current retention payments and investigate why retention is not released on time and request for interest on amounts paid late.
  • Follow up on bank guarantees that are equivalent to cash but must be followed up to ensure they are paid on time as mortgage assets support them.
  • Keep good records and copies of all the correspondence both sent and received.

What to do if retention isn't released

In case the retention money is not released when requested for, the steps below would be ideal to follow:

  • Your system should flag and single out the account for special attention. Ensure that you have achieved the necessary stages that trigger the release of the retention and have followed the right process.
  • Send a polite reminder through the administrative department; ensure you speak to a decision-maker usually the director or the commercial manager.
  • Keep clear records of the many times you have asked for the money and insist politely for an immediate release. In most cases, offer to collect the cheques from them.
  • If still at this point, the retention money remains unpaid, then take this matter seriously and take necessary urgent actions to ensure this money is paid.

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