What Is Retention Amount In Construction?

What Is Retention Amount In Construction
What Are Retention Payments in Construction? – When a contractor wins a bid for a large construction project, some of the money immediately goes to fund the start of the project. A construction retention payment (also called retainage) is the amount of money held back until the project is complete.

Retainage is usually a percentage of the total project cost. It typically sits at 5% or 10%. At first glance, this arrangement doesn’t sound horrible. After all, the industry designed the concept to prevent partially completed projects and poor workmanship. With an incentive to complete the job properly, ethical contractors will receive the final payments when the job is complete.

What this idea fails to consider is:

  • The amount of money involved
  • Extended time frames for full payment
  • The profit margin for the project
  • When a project takes several months or years to complete, a construction retention payment is basically the legal withholding of payment for work already completed.

What is a retention amount?

Contract Retention and Construction – A contract retention provides assurance to an individual that a job will be completed. For example, if someone hires a contractor to remodel his home, he will want to ensure that the contractor will complete the job before leaving.

  1. This can be done through a contract retention.
  2. A retention works by holding onto or retaining a portion of the contract until the job is complete.
  3. Once the job is done and the individual that hired the contractor is satisfied, the contractor will receive the retained portion.
  4. A standard definition of retention money is a percentage of money that an employer or an individual holds as protection from incomplete or inaccurate work done by the hired contractor.

A retention includes two levels:

  1. The hiring individual holds the money until the contract is fulfilled, and he or she is satisfied.
  2. The contractor holds the money from his or her subcontractors,

For the first level, the individual and the contractor will decide upon a retention plan prior to signing the contract. Upon issuance of the completion certificate, the first half of the retention money should be verified and released. Any incomplete or rejected work should be listed in the completion certificate.

  1. If the hired contractor refuses to complete the job, the applicable amount of money will be taken from the remaining retention money so that the individual can hire a third party to complete the job.
  2. The purpose of the second level is to protect the main contractor.
  3. The main contractor is liable for the work done by any subcontractors (s)he or she hires; therefore, he or she can retain the subcontractors’ payments until the job is properly completed.

The last half of the retention money will be verified and issued when the defects liability period ends. The standard for this period is 12 months. This means that the contractor is liable for any issues that occur during those 12 months due to poor construction.

What does retention mean in a contract?

What is Retention? Retention is security held by a procuring contractor to guarantee the performance of a suppling contractor and in particular to safeguard against defects in the event that the supplying contractor fails to satisfactorily rectify them. The security is usually in the form of case withheld (retained) but is often substituted for a bank guarantee or insurance bond. What Is Retention Amount In Construction

Retention applies to both Head Contractors (both a procuring contractor and a supplying contractor) and subcontractors (generally a supplying contractor only) and is usually set at 5% of the value of the works.This percentage is deducted from all of the interim payments made to the head contractor from its employer/client which in turn deducts it from all the subcontractors.

How do you release retention money?

RELEASE OF RETENTION MONEY i) The Retention Money shall be released to the Contractor after preparation of final xxxx and acceptance of the same by the Contractor after the physical completion of work based on the completion Certificate issued by the competent authority stating that the contractor has completed the

What is retention money in construction Philippines?

Retention Money is an assurance for the principal contractor that you will do your job well and right on time. If you do it right, then you deserve to claim it as part of your full payment. If you want to enforce your right on retention money, call Contracts Specialist.

With the right advice, you can get fully paid stress-free. The first consultation is free too. Basically, retention in construction is the act of holding off an amount of money until the construction project gets completed. This ‘retained’ money serves as a security that the subcontractor will do their job well and on schedule.

This also safeguards the principal contractor from paying extra for delays and defects. Time frames apply on the exact time when a subcontractor could claim this retained money. Usually, this money can be claimed after the actual building’s completion and/or after the defects liability period,

What is the purpose of retention money?

Retention & Withheld Amount and GST Real Estate/ Construction Industry is one of most developed industries in India. Real Estate industry is also most unorganised sector in India. It is developing day to day and provided crores of people employment. Real Estate industry has its say in GDP of India.

Retention Amount & Withhold Amount are general words in construction industry, we find theses words in every construction contract, on every level. Retention Clause generally found in every construction contract/agreement. This is the amount, which client /buyer retains, while making payment to contractor as security for completion of work assigned.

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Retention Amount will be percentage of consideration and any be deducted in progressive payment also. It can be held at different levels of contract, such as client /buyer and contractor, contractor and sub-contractor, etc. Retention Amount provides security and safeguard to the client /buyer from contractor to complete work assigned.

  1. Retention Amount and Withhold Amount are two different words.
  2. Both are used in different sense.
  3. The retention percentage is mentioned in the contract itself, whereas the withheld amount is an amount of retention over and above of retention percentage mentioned in the contract.
  4. Let’s consider both situation and applicability of GST; 1.

RETENTION AMOUNT; Retention of money as held by client is a safeguard against defects which may subsequently develop and which the contractor may fail to rectify. It is to ensure that contractor complete the contract within stipulated time and according to the prescribed manner.

The retention money shall be deducted on agreed percentage (as mentioned in contact/agreement) from the amount payable to contractor or on each instalments of progressive billings. A contractor may also deduct from payment to sub-contractors on the same basis. Generally, Retention Amount will be paid on completion of project or receivable of Completion Certificate from concerned authorities.

The Retention Amount is subject to GST as it would be treated as supply, even if money is not released to the contractor, because such retention money represents the value for the construction services. The amount of progress billing, including retention money, has to be accounted for GST based on the date of invoice as stated in the construction contract.

EXAMPLE: Let’s consider Mr. A is a contractor, has entered into a contract to complete a project whose consideration was Rs.84,000. Mr. B is the client/employer, now Mr. B and Mr. A has entered into a contract in which a clause has been entered such as from each progress billing Mr. B shall retain @5% of the amount of invoice as retention money and same shall be released on satisfactory completion of project.

The project completed in two phases;

Particulars Amount (Rs.)
Value of Materials & Works 30,000.00
GST (Rs.30000*18%) 5,400.00
Total Amount 35,400.00
Less: Retention Amount (Rs 30000*5%) 1,500.00
Net Amount paid in Phase-I 33,900.00
Value of Materials & Works 84,000.00
Less: Amount paid in Phase-I 28,500.00
Net Amount 55,500.00
GST (Rs.55,000*18%) 9,720.00
Less: Retention Amount (Rs.84000*5%) 4,200.00
Amount Paid in Phase-II (Excluding GST) 51,300.00
Total Retention Sum 4,200.00
GST Paid on Retention Sum at the time of invoicing (Rs.4200*18%) 756.00

NOTE: In above case you have to account GST at the earliest on issuance of Invoice or on receipt of payment. In above case retention amount Rs.4200/- is exclusive of GST. Now you have to account GST amount of Rs.756/- at the time of issue of invoice or receipt of payment, whichever is earlier.2.

  • WITH-HELD AMOUNT; In some cases, the buyer may withhold some portion of amount which is being part of the terms of agreement with builder & developer.
  • Such withheld amount is possibly over and above the terms of the contract.
  • Hence under those cases, GST shall be payable on Running Account bill raised on the client.

It may be noted that even though such amount may have been received from the client or the buyer, GST shall still be liable on such withheld amount. EXAMPLE: Mr. A contractor enters with Mr. B into a construction contraction for a project total consideration of Rs.84,00,000/-.

Particulars Amount (Rs.)
Value of Materials & Works 3,00,000.00
GST (Rs.30000*18%) 54,0000.00
Total Amount 3,54,000.00
Less: Retention Amount (Rs 30000*5%) 15,000.00
Net Amount paid in Phase-I 3,39,000.00
Less: Withheld Amount 1,00,000.00
Amount Paid 2,39,000.00
Total Withheld Sum 1,00,000.00
GST Paid on Withheld Sum at the time of invoicing (Rs.4200*18%) 18,000.00

NOTE: In above case we see that GST is calculated on full contract value, including retention amount and withheld amount. Thus, we have to account for GST as soon as invoice has issued to Mr.B. We have to note that the amount on withheld amount shall be reversed if same is not paid by Mr.

  • B to Mr. A within a period of 180 days from the date of issue of Invoice.
  • ACCOUNTING FOR WITHHELD AMOUNT/ IF WITHELD AMOUNT NOT RECEIVED FROM CLIENT; As we have discussed above, GST has been paid on withheld amount at the time of issued of invoice.
  • The same shall not be subjected to again GST, on receipt basis.

Now let’s consider, when client has not paid withheld amount, then there shall be two ways to account the same as follows; i) Bad debts- now in this case reversal of liability of GST or the credit will not available; ii) Raising a Credit Note- if a builder/contractor issued Credit Note then, the benefit of reversal of GST liability is available only when the recipient reverses the proportionate credit claimed for such supply if he is a registered buyer.

ONE QUESTION ARISES, DE WE HAVE TO REVERSE CREDIT OF TAXES PAID ON RETENTION AMOUNT; SECTION 16(2) of CGST Act, 2017 is relevant in this case a proviso has been added and same provides that; “Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed.” The above proviso clearly mentioned that if recipient fails to pay the supplier, the amount of consideration along with tax thereon, within a period of 180 days from issued of invoice, the recipient will not be able to take credit of tax paid on such invoice. The Retention Amount does not fall under above proviso, if contract provides or allows client to retain certain %(percentage) of consideration as retention.

We can analyse Retention Amount on the basis of above proviso, suppose client/buyer has not pay the retention amount to the client, within a period of 180 days from the date of issue of invoice. In this case if terms and conditions of contract provides so, that a portion of consideration shall be kept by client/buyer till completion of contract, then the client shall take full credit of taxes paid on the payment made to the contractor.

  • A contractor shall get a certificate by mentioning that 5% (assuming to retention) sum shall be certified and invoiced only upon completion of the defect liability period.
  • Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation.
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Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advise of consultants.

How retention is calculated?

Retention rate is often calculated on an annual basis, dividing the number of employees with one year or more of service by the number of staff in those positions one year ago. Positions added during the year would not be counted.

Why retention money is kept by contractor?

What Is the Purpose of Retention Money? – The purpose of retention money is to provide protection to the employer. The purpose of retention money is to give the idea of the importance of completing construction work or signed projects as per the terms and designs stated by the client in the contract,

  1. The purpose of retention money is to make the contractor complete the scope of construction work under his contract in order to receive the retention money amount withheld by the client,
  2. The purpose of retention money is to protect the employer against the money he pays in monthly progress claims.
  3. With such retention money held by the employer, the contractor takes the responsibility to complete the construction project as per the terms, design and quality stated in the initial contract.

The purpose of retention money is providing security in the form of a source funds when the contractor fails to complete the construction work as per the contract they can rectify the defects in construction by the retention money. Contract retention provides assurance to an individual that the construction work will be complete d.

Why do contractors hold retention?

What Is Retainage? – Retainage is the withholding of a portion of the final payment for a defined period to assure a contractor or subcontractor has finished a construction project completely and correctly. Retainage, a standard practice in both public and private projects, functions as a financial incentive and guarantees that the project is completed to the owner’s satisfaction.

Why is retention used in construction?

Retention is a sum, generally deducted at each monthly payment notice, to provide the client with some security that the contractor/sub-contractor will return to correct any defects during the defects correction period, or defects liability period.

When should retention money be paid out?

Retention and the current state of the construction industry 4 September 2018 A retention is a percentage of the contract payment value which is held by the Employer as a security for the quality of the workmanship and materials. That is why, usually, half of the retention is released at achievement of practical completion, when the work is finished, and only patent defects are to be rectified.

  1. The old BIFSA (Building Industry Federation South Africa) “white form” contract provided for a retention fund to be held by the Employer as a guarantee for the completion of the contract.
  2. The retention was held in an interest-bearing account and such interest accrued to the benefit of the Contractor.

When the JBCC was adopted, this arrangement was abandoned. A relatively recent development is the adoption of the provision of a retention guarantee which is usually provided as an alternative to a cash retention. This is attractive for the employer because it means at day one, he has security for the full value of the retention and will not have to wait until most of the work is done before he gets a meaningful security against defective work.

  • Late payment or release of the retention; and
  • Non-payment of retention monies
  • Insolvency of the holder of the retention money
  • Late and/or non-payment or release of the retention
  • Unjustified late and non-payment of retention monies is a significant cause of issues associated with the practice of holding cash retentions within the construction sector.
  • Unfortunately, retention have also been used as a poor excuse to withhold or avoid paying contractors and are now viewed by many as an unfair and potentially problematic arrangement and currently, there are no measures in place to tackle the issues.
  • The late or non-payment usually results in cashflow issues for the contractor or the subcontractor.
  • It is therefore important for the employer, or the contractor in relation to sub-contracts, to ensure that they comply with contractual provisions, not only in the deduction of retention monies, but also their release.
  • How to protect yourself
  • Knowing your rights as a contractor (or subcontractor) will help to ensure that you get paid on time by looking out for the following issues;
  • The Subcontractor should seek to ensure that the release of their retention is not tied to the completion of the main contract and/or the release of the retention fund under that main contract;
  • Ensure that the deduction made is in accordance with the contract, in the right amount and that the right percentage is deducted;
  • Retention monies are held in trust or insisting on a retention guarantee.

What happens to retention monies when the party holding the monies is insolvent? In the event of the holder of the retention being placed under business rescue, the retention monies will be mixed with other sums and or monies in the business. The business rescue practitioner would be entitled to use the money to try and rescue the business or company.

The retention monies will be subsumed with the rest of the money and can, effectively be lost. Should business rescue proceedings fail, and the business rescue practitioner applies for the company to be placed in liquidation, the contractor or subcontractor is a concurrent creditor and not a secured or preferred creditor.

This means that the contractor or the subcontractor is left to stand in line with all the other creditors for a share of the distributable assets.

  1. As a result, a large proportion of retention monies are lost due to the holder of the retention being insolvent.
  2. International move towards “No retention policy” or retention money trust account
  3. There has been a move aimed at doing away with the negative effects of the holding of cash retention in the construction industry.
  4. In 2011, a ” No Retentions Policy ” was launched in Scotland designed to help contractors resist cash retention policies.
  5. In Australia, a trust account scheme for subcontractor’s retention money held by main contractors commenced on the 1 st of May 2015 as a part of security of payment of the retention monies.
  6. The purpose of the trust is to ensure that in the event that the party holding the retention is insolvent, those monies are not mixed with the other sums and can easily be identified and paid in terms of the contract.
  7. South African context and conclusion
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It is advisable for the parties to a construction contract to include a provision for a retention guarantee, in lieu of the cash retention. Alternatively, the parties can include a clause for a retention fund held by the Employer as security and providing for any interest on such fund to accrue to the Contractor upon completion of the work.

Who holds retention money?

What is Retention And How Does It Work? – Retention is money held by the Employer/Client as a safeguard against defects which may subsequently develop and which the Contractor may fail to remedy. Retention is usually set at either 5% of the value of the works or 3% in the case of some (usually larger) contracts.

  1. This percentage is then deducted from all the interim payments made to the main contractor who then deducts it from all his sub-contractors.
  2. Once the sub-contract works are complete, the percentage of monies to be deducted as retention should be halved and what is described as the first moiety of the retention should be paid back to the sub-contractor.

This stage of the sub-contract works has different names in different contracts but “practical completion” is a common term. Ordinarily there then follows a period commonly known as the “defects liability period”. This is usually either 6 months or 12 months, and 12 months is common place.

Is retention money a deposit?

28 February 2014 the basic difference is that security deposit is given by the depositor/tenant etc whereas retention money is retained out of payments to be made to the developer. So security deposit is in excess to the contractual payments whereas retention money is part of contractual payments withheld subject to certain compliances.

What is retention money example?

What is Retention Money in Construction Contracts? – Retention money is the amount of money deducted in the progress claim and keep by the employer. This is to safeguard the employer from any non-conformance of work by the contractor. Usually in construction contracts,10% of the progress claim is deducted as retention money.

What does 5% retention mean?

What is the purpose of retention? – Retention is a percentage (usually up to 5% of the contract sum) of each payment made under a construction contract which is withheld in order to try and ensure that works under the construction contract are completed to the required standard.

What is mean by retention money in contract costing?

The balance amount of work certified is retained by the contractee till the completion of the entire contract satisfactorily. The amount so retained is called ‘retention money’. The contractee so retains to safeguard himself from the risks that may arise from the contractor.

What is a 25% retention?

A retention bonus, also called retention pay or a retention package, is a lump sum of money a company pays to an employee to stay with the company for a specific amount of time. Usually, retention bonuses are sizable amounts of money, ranging from 10% to 25% of an employee’s base pay.

How much is a good retention?

A 100% retention rate is always good. Meanwhile, a 15% retention rate is usually bad.

What’s a good retention rate?

What is a good employee retention rate? – Generally, employee retention rates of 90% or higher are considered good, meaning a company should aim for an average employee turnover rate of 10% or less. In 2021, the average retention rate was around 52.8% 2, but the individual rate varies by industry and sector.

Industries with the highest retention rates include government, finance, insurance, and education, while the lowest rates are in the food, retail, and hospitality industry. However, a very high retention rate, like 99%, may not always be good either. Some turnover is helpful to carve out career paths for high-performing employees within the organization or to bring in external talent.

You may also want to terminate low-performing or average employees through voluntary turnover to make your company more productive and efficient.

What is a $1500 retention bonus?

A retention bonus, also called retention pay or a retention package, is a lump sum of money a company pays to an employee to stay with the company for a specific amount of time. Usually, retention bonuses are sizable amounts of money, ranging from 10% to 25% of an employee’s base pay.

What is retention money example?

What is Retention Money in Construction Contracts? – Retention money is the amount of money deducted in the progress claim and keep by the employer. This is to safeguard the employer from any non-conformance of work by the contractor. Usually in construction contracts,10% of the progress claim is deducted as retention money.

What is retention amount in banks?

Solidly backed by the bankPromotes active trading

Retention Money Guarantee is a written document issued to the owner or the buyer from the Bank to guarantee that applicant will continue to fulfill contract obligation after withdrawing final payment of the contract price in advance, at the request of construction contractor or supplier.

DepositsAny other collateral accepted by bank

Submission of Original Guarantee Bond is must for the cancellations.Non Submission of Original Guarantee Bond will be charged a penalty fee.

Details and terms & conditions mentioned in this page may change from time to time Please contact the nearest branch for prevailing details and terms & conditions

Is retention money a deposit?

28 February 2014 the basic difference is that security deposit is given by the depositor/tenant etc whereas retention money is retained out of payments to be made to the developer. So security deposit is in excess to the contractual payments whereas retention money is part of contractual payments withheld subject to certain compliances.