Can Retention Money be released before TOC?

According to Dennis C. Bausman, the practice of retention prevails from nineteenth century, the era of Victorian Architecture, in the UK construction industry. This age observed a rapid rise in the quantity of contractors, often with diminutive experience of the construction works due to the demand by the increased size of railway project. There was an escalation in the quantity of liquidation and a decline in workmanship standards which expose the UK railway to risk. UK Railway hence instigated retaining a minimum of 20% of payments to ensure performance and offset completion costs if the contractor was found unable to keep the promise.

Purpose of Retention Money

According to the Arbitration determination in ICC Case 15789 (2010), it is a purpose of the Retention Money to provide guarantee to the Employer that in case the works will not be finished in compliance with qualitative parameters, so that the hand-over and take-over will not be confirmed by the Engineer and the Contractor will not be willing to remove all declared defects, such finances can be used to employ third persons to remove such defects of Work (visible at the hand-over).

Why it is required to release early Retention Money

It is well known to all the parties why the Contractor requires early release of retention money. According to a recent survey conducted by TSheets and Levelset, 1 in 5 construction companies says cash flow is a constant problem. 92 percent of construction companies say their customers don’t always pay them on time. a recent levelset article on cash flow reported that the average time it takes for a construction company to get paid is around 73 days. According to Dennis Bausman, general contractors wait an average of 99 days to get their retainage, and subcontractors wait an average of 167 days. And, according to a study in the U.K., over 25% of retained money was never paid!! According to a 2004 report published by the American Subcontractors Association, the majority of subcontractors believe that “[prime] contractor abuse of their retainage” is a widespread problem.

Moreover, now a day, the Contractors are suffering due to many events like Ukraine-Russia crisis, impact of COVID-19 upsurge, sharp increase of the shipping cost, increased inflation rates which causes the Contractor’s negative cash flow and deprives the Contractor from its contractual rights and diminish the Contractor’s ability to perform the Contract.

FIDIC Mechanism for Release of Retention

FIDIC GC Sub-Clause 14.9 [Payment of Retention Money] states “When the Taking-Over Certificate has been issued for the Works, the first half of the Retention Money shall be certified by the Engineer for payment to the Contractor.” It also states “Promptly after the latest of the expiry dates of the Defects Notification Periods, the outstanding balance of the Retention Money shall be certified by the Engineer for payment to the Contractor.”

FIDIC GC Sub-Clause 14.9 [Payment of Retention Money] further states “Unless otherwise stated in the Particular Conditions, when the Taking-Over Certificate has been issued for the Works and the first half of the Retention Money has been certified for payment by the Engineer, the Contractor shall be entitled to substitute a guarantee, in the form annexed to the Particular Conditions or in another form approved by the Employer and issued by a reputable bank or financial institution selected by the Contractor, for the second half of the Retention Money.”

Critical Analysis for Early Release of Retention Money

From the above reference of FIDIC, it can be understood that Retention Money can be released on three conditions:

1.???? upon completion of the Works i.e. issuance of Taking Over Certificate (TOC) by the Engineer;

2.???? Upon Completion of the remedy defects i.e. after expiry of the Defects Notification Periods (DNP);

3.???? Upon submission of Retention Guarantee by the Contractor.

It can be found from the above item 1 and item 2 that the Contract is allowed to receive retention money upon completion of the Contractor’s milestone obligations. The third item is not a contractual obligation, but an indemnity mechanism which is generally used to indemnify one party from the breach of other party in the Contract. There is no reason stipulated in the Contract and even in Contract Law of any jurisdiction around the globe that it cannot be applied for 1st milestone obligation (upon completion of the Works i.e. issuance of TOC) which will allow the Contractor to reinforce his ability to perform the Contract. In this regard, the Contractor refers to FIDIC Sub-Clause 16.2 (d) which states that it is the Employer’s obligation to keep the Contractor capable to perform the Contract.

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Reference of Bangladesh Procurement Law

According to the Public Procurement 2008 Rules of Bangladesh, Retention Money can be released on three conditions in the same manner of the FIDIC Conditions of the Contract as cited above. It also allows that Retention Money can be replaced by the Security Guarantee from the beginning of the project.? In this regard, Chapter 3 Procurement Principal Article 27(5) states “Performance Security shall be required to be valid until a date twenty-eight (28) days from the intended completion if there is no condition for deduction of retention money.” Also Article 27(7) states “The Performance Security shall be replaced by a new security covering (fifty percent) 50% amount of the Performance Security to cover the defect liability period if condition for deduction of retention money has not been applied.” In view of the above provision, it can be concluded that there is no contractual shortfall to release early retention money against the guarantee in Bangladesh.

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Conclusion

The bottom line is that the Contract should be worked out to make business sense and maintain its efficacy. It is the Employer’s contractual obligation to act in such a manner so that the economic balance of the contract is maintained and the Contractor become able to perform the Contract as per FIDIC Sub-Clause 16.2. Therefore, the Employer should take all reasonable steps including early release of retention if there is no harm available for him. It is not to be overlooked that the Engineer may withhold the estimated cost of any work which remains to be executed under FIDIC Clause 11 [Defects Liability] to indemnify the Employer. However, in order to protect the Employer's interests, the amount withheld should be sufficient to cover the cost of another contractor completing the work but must be reasonable and not penalize the Contractor. We can see that taking into consideration of the business efficacy, FIDIC Guidance for the Preparation of Particular Conditions suggests that If part of the Retention Money is to be released and substituted by an appropriate guarantee, an additional Sub-Clause may be added,

“When the Retention Money has reached three-fifths (60%) of the limit of Retention Money stated in the Appendix to Tender, the Engineer shall certify and the Employer shall make payment of half (50%) of the limit of Retention Money to the Contractor if he obtains a guarantee, in a form and provided by an entity approved by the Employer, in amounts and currencies equal to the payment.”