Retention at practical completion

Retention is a deduction from a payment, held as security that the contractor will come back and put things right. Under JCT the mechanism is set out at clauses 4.18 to 4.20, and it has two stages.

The two stages

Before practical completion, retention is deducted at the full rate. On a JCT Standard Building Contract that is typically 3 per cent; on Minor Works, 5 per cent is common. Your contract particulars decide.

At practical completion the rate halves. Half of what has been held is released to the contractor, and future deductions are made at the reduced rate.

At the end of the rectification period, once defects have been made good and the certificate of making good has been issued, the balance is released.

Why the second release goes missing

Practical completion is loud. There is a meeting, a certificate, a handover, and the contractor is watching for it. Nobody needs reminding.

The end of the rectification period is silent. It falls twelve months later, on a job that closed long ago, with a surveyor who has moved to other work and a contractor who may have stopped chasing. The money simply sits there.

On a £220,000 contract with 5 per cent retention, the balance held after practical completion is around £5,500. That is not a rounding error. It is a month of a small practice's overheads, sitting in someone else's bank account because a date passed unnoticed.

The mistake surveyors make on the way there

There is a subtler error that appears before either release, and it causes arguments.

Retention is deducted from payments, not from approvals. Until a payment has been certified there is nothing to retain from, however many variations have been approved in the meantime.

A dashboard that counts retention against approved variations will show a figure larger than the retention notice actually sent to the client. When the client questions the difference, the conversation stops being about the works and starts being about whether your figures can be relied on. That is an expensive place for a valuation discussion to end up.

Where the dates come from

Three dates drive the whole mechanism, and all three live in the contract particulars:

• Practical completion. Sets the moment the rate halves.
• Rectification period. Usually six or twelve months, counted from practical completion.
• Certificate of making good. Triggers the final release.

Note that the final release is triggered by the certificate, not merely by the calendar. If defects are outstanding at the end of the rectification period, the balance is not automatically due. But equally, a certificate that nobody chases is a release that never happens.

Half rate is not the same as half the money

A point that causes confusion in valuations after practical completion. Halving the rate means future deductions are made at the reduced percentage. It does not mean the previously held retention is recalculated at the lower rate.

What is released at practical completion is half of what was held. What is held going forward accrues at the halved rate. Those are two different operations and doing only one of them produces a figure that is wrong in a way nobody notices until the final account.

A short checklist

• Record the practical completion date the day it is certified, not at the next valuation
• Release half of what is held, and drop the rate for future deductions
• Diary the end of the rectification period the same day
• Chase the certificate of making good rather than waiting to be asked
• Check that your internal retention figure matches the notice the client received

None of this is difficult. It is a bookkeeping discipline stretched across a year, which is precisely the kind of thing people are bad at and software is good at.