Retention Payments

Retention payments are a challenging subject within the construction industry and an area that continues to be debated within the sector and Government.

As professional debt collectors, we are only too well aware of retention payments and the negative impact overdue and late payments on retentions, causes contractors and subcontractors. Affecting their cash flow and, in some cases, business survival.

Retention Fee Meaning

A retention payment is an amount of money still owed to a contractor/subcontractor and is typically around 1.5% to 5% of the total bill, which, as you will know, in the construction industry, could equate to thousands of pounds.

The customer holds back this percentage of the final invoice until the job is complete and all snagging and fixes have been sorted.

This sum of money is often held back as leverage or used to persuade contractors to complete the job and fix any problems.

Many people like to think of retention payments as a security deposit, where the customer can have peace of mind that all work will be completed in full, as well as any fixes in place for areas they’re not happy with before the invoice is paid in its entirety.

However, this is where there is a big problem in the sector – retention money is very rarely paid on time, often due to the time that has elapsed, or in some cases, even paid at all.

In fact, reports show that there are billions, billions of pounds outstanding in payment retention in just a 12-month period – hence, small business debt collection has now become vital in this area as these amounts outstanding can not only affect individuals and their small business, but it can disrupt entire supply chains.

How long can retention money be held for?

Retention payments are typically split into two, with half of the retention money paid on completion of the job and the final half of the retention money paid once all the `snagging` defect areas have been fixed and completed.

This means that invoices can remain outstanding for a considerable amount of time (maintenance and snagging can last up to 12 months), affecting your cash flow and work.

This sum of money is invaluable and ultimately affects others’ profit margins; with the job complete, contractors are entitled to this payment.

So what can you do?

Small Business Debt Recovery

To avoid falling into the retention payment trap, steps you can take include:

Checking your contract – what are the due dates for payments? The final date for payment? Is there clarity on payment terms? Any stipulations?

Keep open communication – by keeping open communication when payments become overdue, make sure to contact the relevant person to find out what the hold-up is. At this stage, you can also send a formal written notice explaining that the payment is overdue and the deadline.

Note: The contractor/customer must provide you with written notice as to why they are withholding payment. For example, if there are snagging issues, and you agree with them, fix them and seek final sign-off ASAP. This should prompt payment of the retention.

Have robust credit control processes – helping to stop overdue invoices from slipping through the net. Detail credit control procedures help you stay on top of your cash flow more effectively. Establishing terms and conditions is key, including late payment terms and penalties to protect you.

Stay on top of payment dates – as part of your credit control process, make sure to stay on top of payment dates, meaning as soon as a payment is overdue, you can call, issue reminders, and start your debt recovery process.

Keep accurate and up-to-date records – use this as an evidence trail. Trust us; clear information makes everything more efficient.

Act sooner rather than later – the longer you leave things, the worse it is to follow up on, and the harder it is to collect payment. Acting sooner means a higher chance of a successful outcome.

Get professional help – working with a professional debt recovery agency means you have access to expertise and experience in this area. We understand the challenges you face, and we aim to protect your reputation and customer relationships while also ensuring we successfully collect on monies owed to you.

The retention payment system is considered by many an outdated practice that restricts the construction sector from growing.

With several attempts to reform retention due to large construction contractors collapsing, it is widely viewed that cash must be injected into struggling supply chains rather than continue to fuel a fall in business turnover.

Chasing payments can be time-consuming, it can take up a lot of resources, and it takes a lot of perseverance.

At Direct Route, we’re specialists in all areas of debt collection, working with B2B customers to successfully collect outstanding or overdue invoices to help maintain a healthy cash flow.

To find out more, call us today at +447860197476 or email your requirements to memberbenefits@directroute.co.uk