18 BUSINESS AND TRAINING
Securities | Retention
By Uwe Putlitz
Uwe Putlitz is a registered professional Architect and Construction Project Manager , a Fellow of the Royal Institute of Chartered Surveyors ( RICS ) and is a visiting lecturer at the School of Construction Economics and Management at the University of the Witwatersrand . Having recently retired as the Chief Executive Officer of the Joint Building Contracts Committee ( JBCC ) he specialises in the avoidance of construction disputes by way of lectures , technical articles dealing with aspects of contract administration for various industry publications arising from the use of Standard-form Contracts including the Federation Internationale des Ingenieurs-Conseils ( FIDIC ), the General Conditions of Contract ( GCC ), the JBCC or the New Engineering Contract ( NEC ) to find an acceptable settlement without resorting to legal processes , where possible . info @ buildstrat . co . za
In business it is not unusual for the purchaser to require a ‘ product warranty ’ that shows a product is fit for purpose and will perform correctly for a stipulated period provided no abuse occurs .
A security may provide recourse to the purchaser where delivery is late or when the final product fails to perform to specification , to recover an amount of money from a Guarantor . Aside from the provisions of the Consumer Protection Act for ‘ domestic items ’ and limited common law provisions , a purchaser or client may require the supplier to provide a monetary guarantee or security for specified non performance
In the building and civil construction industry one common form of ‘ security ’ over many years has been the withholding of a defined percentage on progress payments , colloquially referred to as ‘ retention ’, to the Contractor ( or Subcontractor ) until successful delivery of the product when this retained amount is repaid . Sadly , in many instances in South Africa and elsewhere , the amount due to a ( Sub ) Contractor is seldom repaid by the due date and often only in part after unjustified deductions for alleged defective work . Where the Contractor has not made good identified defects , the Employer may appoint others paid for using the retained money . Most Standard-form building and civil Contracts describe the Retention process [ to withhold 10 % of the amount certified for payment to the Contractor until 5 % of the Contract Sum is reached , to repay 2.5 % at Practical Completion and include the remaining 2.5 % in the Final Account ] but not the repayment criteria nor that a neutral entity should verify such actions . The Retention amount withheld reduces the Contractor ’ s cash flow - this can become a significant sum of ‘ frozen ’ money to cover several projects worked on at a given time . Common practice is that Retention is simply held by the Employer and similarly , the Contractor as the employer of Subcontractors , and paid to the ( Sub ) Contractor at the conclusion of the Works without paying interest and without neutral adjudication of claims utilising such money . In the event of liquidation of either Party – the Retention belongs to the Employer until payment to the Contractor is included in a Payment Certificate – English case law followed in South Africa .
Should the Employer fail to release retained funds at the due date the Contractor is at financial risk . This amount is probably equivalent to the profit on the project that now becomes a business risk . One possible solution is to invest such money with a financial institution offering an escrow account that is administered by a neutral agent .
By investing retained money in an escrow type account , it is under the control of an independent financial institution and subject to a regulated administrative process . The Parties to a contract nominate the Contract Administrator to issue regular Payment Certificates for the ‘ retention ’ amount withheld from the ( sub ) contractor to be paid into this account and similarly a Payment Certificate to the financial institution when money is due to be paid back to the ( Sub ) Contractor at Practical Completion and when the Final Account is to be paid , or when a valid Employer ’ s claim is certified for payment by the Contract Administrator . The tender documents should specify this procedure , the percentage of the Contract Sum to be retained , the payment dates and completion dates , interest earned and bank charges incurred on the investment are apportioned , and provide proforma documentation and letters of authority to be signed on award of the Contract
The Federated Employers Mutual Assurance Company that has since 1936 served the building industry with a variety of insurance and related products has now introduced a ‘ retention fund ’ financial vehicle to administer such funds more cost effectively than market related products dealing with small to medium size projects executed by small and medium sized Contractors
The provision of financial guarantees has become a specialised field within the financial services industry . The provider of a Security generally requires a cash deposit or other realisable asset from the Applicant to be issued with a “ guarantee ” in favour of the Beneficiary – who may be entitled to money to make good the Applicant ’ s default subject to the procedures incorporated in a Guarantee ( Security , the terms are interchangeable ). The value of a Performance Security is determined according to the perceived risk of a project , but generally limited to 10 % of the Contract Sum . Such Guarantees may be issued by a bank or similar institution requiring a matching investment or by a holding company in favour of a subsidiary company .
The insurance industry has seen this as a business opportunity to charge a competitive up-front fee to issue a security based on the contractor ’ s track record and the perceived risk of claims arising during the project execution instead of a fixed percentage of the contract sum , as banks do .
www . plumbingafrica . co . za @ plumbingonline @ plumbingonline @ PlumbingAfricaOnline November 2022 Volume 28 I Number 9