Re: RETENTION MONEY SECURITY

**RJM** Tue Jul 12, 2011 2:01 pm

JDM, first and foremost, welcome to the Knowledge Management Database.

I do hope there is nothing confusing; just make closer follow up of discussions in particular the submission which introduced this topic. If it does not make any sense please back come back

JDM Tue Jul 12, 2011 4:39 am

Members!
Im a new member in a forum and certainly a new member in Public procurement industry. Can you please help with the the meaning of Retention money security and retention money?? what are the key features to each?? a bit confusing!

Akida Tue Jun 14, 2011 9:50 pm

But it can hapen that during the defect liability period the contractor does not attend defects as instructed, having retention money after expiration of DLP the client can easily hire someelse to do the work at the contractor's cost. to me the client should choose between bond and money.

I submit

**RJM** Wed Mar 16, 2011 2:15 pm

RSM wrote;

Dear Forum Members,

It is interesting that this topic is under discussion in Phillipines Procurement Forum- you can obtain their view point on

http://gppb.forumotion.com/t192-retention-money-vs-surety-bond-no-final-acceptance-of-work-yet

The good thing is that in Philippines the issue of Retention Bond in lieu of Retention Monies has been incorporated in their legislation. Reproduced below for reference

Annex "E" of IRR-A, which is specifically covers the "Contract Implementation Guidelines for the Procurement of Infrastructure Projects", specifically Item 6 - Retention Money, has the following provisions:

"2. The total "retention money" shall be due for release upon final acceptance of the works.
The contractor may, however, request the substitution of the retention money for each
progress billing with irrevocable standby letters of credit of from a commercial bank,
bank guarantees or surety bonds callable on demand, of amounts equivalent to the
retention money substituted for and acceptable to Government, provided that the
project is on schedule and is satisfactorily undertaken. Otherwise, the ten percent
(10%) retention shall be made. Said irrevocable standby letters of credit, bank
guarantees and/or surety bonds, to be posted in favor of the Government shall be valid
for a duration to be determined by the concerned implementing office/agency or
procuring entity and will answer for the purpose for which the ten percent (10%)
retention is intended, i.e., to cover uncorrected discovered defects and third party
liabilities.

As suggested by the other contributors in this topic the contractor has to make choice within his capacity.

What I deduced from Philippines forum is that the principle and application of the Retention will remain the same - to ensure QUALITY IS ACHIEVED.

Should we emulate this practice?

**RSM** Wed Mar 16, 2011 12:44 pm

Dear Forum Members,

It is interesting that this topic is under discussion in Phillipines Procurement Forum- you can obtain their view point on

http://gppb.forumotion.com/t192-retention-money-vs-surety-bond-no-final-acceptance-of-work-yet

**RJM** Mon Jan 25, 2010 9:14 pm

RSM point of information, the interest accrued shall belong to the Employer and Employer shall be under no duty to account for any such interest to the Contractor or any sub-contractor. Let us get contribution from others.

**RSM** Mon Jan 25, 2010 8:07 pm

RJM

I do not think that current procurement legislation would be a hindrance especially if we all agree that retention money is money that the contractor is already entitled to its payment based on the work he has already done but we are retaining it as a security for repair/maintenance work for a certain period after the completion of the contract.

If the above is clear with us then I do not see why PPRA should not issue guidelines only without the need to change the Act or Regulations on how to guarantee that the contractor will not default in the defects liability period by requiring them to submit retention bond

OR

knowing that the retention money belongs to a contractor, if deducted to have a special account as you are suggesting in which any interest which acrue belongs to the contractor.

**RJM** Mon Jan 25, 2010 7:48 pm

RSM, it goes without says that for a Client to deduct the retention money rather accept the retention bond is best option in business terms. On the other hand, you will agree with me that delay in the release of retention is common in the industry and it is even worse in the event of the insolvency of any party in the payment chain, retention may be lost altogether. In case of the employer's insolvency, retention monies will not be considered within the general assets of the employer for distribution among creditors. How do you handle situation like this? How much the Employer will pay as interest in case delaying unpaid sum considering 50% of 2.5 billions to be released after DLP.

However, I have come across Housing Grants, Construction and Regeneration Act 1996 [UK] which requires Employers open a separate account for the retention monies. The standard forms, including those of the JCT set out detailed rules for the treatment of retention and provide that the employer holds retention in trust for the contractor. [i] The Employers interest in the retention is fiduciary as trustee for the contractor [but without obligation to invest]. [ii] The Employer shall be entitled to the full beneficial interest in any interest accruing on the separate banking account and shall be under no duty to account for any such interest to the Contractor or any sub-contractor. RSM, I think [ii] fit well in your second concern BUT can it be implementable under the current procurement legislations?

**RSM** Mon Jan 25, 2010 5:46 pm

Galibona,

I agree that the retention bond will have cost implication but it can be made a choice by the contractor himself. Accept deduction of retention money from monthly certificates or provide a retention bond which will enable all payments under interim certificate be paid to him.

I am sure if this option is allowed, many contractors will agree on the provision of retention bond rather than having the actual money deducted from the certificates. Equally important it will remove the burden on the part of the Client- particularly public sector client who budgets may not be very reliable- to set aside money to pay for retention later after the completion of the contract.

On the other hand if I am a Client with let's say a Tshs. 50 billion project to be completed in 24 months, assuming an even average monthly cash flow of Tshs. 4,166,666,666.67. If the contract provides for retention money of 5% with a maximum of 5%, total retention money will be Tshs. 2,500,000,000/- deducted at a monthly rate of Tshs. 208,333,333.35 per month for 12 months. So halfway the project I would have saved Tshs. 2.5 billion which would otherwise have been paid to the contractor. And this money I will not be required to pay the contractor until he finishes the contract in month 24 where I will pay only 50% and the rest to be paid at the end of defects liability period. As a Client I would rather deduct the retention money rather than accept the retention bond.

Mathias Galibona Wed Jan 20, 2010 3:26 pm

RJM
I have experienced many Contractors having cashflow problems when they are awarded a project despite the fact that their bid documents showed that they are financially sound.

If the Retention Money Security is introduced and required to be submitted at the beginning of the Contract, will increase the overburden to the Contractor's cashflow. This is because he has to submit together with the usual guarantee normally required i.e. Advance Payment Guarantee and Performance Guarantee.

The idea of having the Retention Money Security is good in terms of assisting the Contractor's Cashflow when executing the works because no deductions on the Interim Payment Certificates. My suggestion is that the Security be provided within the second month after start date for contracts having duration of six (6) months and above. Failure to provide it, then it should be deducted from the Interim Payment Certificate.

For Contracts having duration of less than six (6) months, the security is not suitable.

I submit.

**RJM** Wed Nov 04, 2009 4:48 pm

Retention Money Security (Retention Bond) is the type of performance bond that protects the client after a contract or project is finished. It guarantees that the contractor will carry out all necessary work to correct structural and/or other defects discovered immediately after completion of the contract, even if full has been made to the contractor. Normally it is provided by the contractor once only at or near to the commencement of the contract for the full amount of the retention i.e. 10% of the contract price. The bond is released in stages; one half upon issue of Take-over Certificate [Practical Completion Certificate] with the final half being released upon issue of Defect Liability Certificate [Completion Certificate/Performance Certificate]. The major difference between this bond and Retention Money is that no monies are deducted in the interim certificates since the contractor has already provided bond equivalent to the total retention. Furthermore, it applies the same principles of releasing retention money.

I believe that most of us we have come across cases where Procuring Entities fail to release the retention monies as per terms and conditions governing the contract. This is because the monies are retained in their accounts and used for other activities forgetting that the retention monies are contractors’ monies.

Is it the time right now to have Retention Money Security in lieu of Retention Money?

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