Construction Law/Release of Retention Money
QUESTION: Dear Sir,
I would like you to advise me about the release of the retention money of the subcontractor. The main contractor has a subcontract agreement for the construction of cut-off wall in the dam section of a hydro power project.
The date for the release of the retention money was stipulated as 18th May 2015 (one year after practical completion of the works at Site as required for defects notification period). According to the subcontract agreement, the quantities certified for the subcontractor will be according to the quantities certified for the main contractor. However some small quantities are still not certified by the Engineer for the main contract (main contract is under FIDIC 1999 Red Book) because of disagreement on the method of measurement, therefore the final certificate has been still not issued to the subcontractor. However as the due date of 18th May 2015 for the release of the retention money is over and the subcontractor now requests for the release of the retention money.
My question is: what shall be the method of release of this retention money. Can we just simply transfer this amount in the subcontractors account like other previous payment of his IPCs and ask for his confirmation for receipt of this amount or we need to prepare another interim payment.
Looking for your guidance, please.
ANSWER: Hi Muhammad,
Good day to you.
While you have not mentioned the form of contract employed between the Main Contractor and Subcontractor, but in most forms of contract and in FIDIC 1999 Red Book in particular (Main Contract with the Client), Retention Money shall be certified and paid in two (2) major stages:
a. First Half of Retention Money shall be certified upon issuance of Taking Over Certificate for the Works (or Practical Completion Certificate or other similar term). Retention Money for Section or Part of the Works shall be certified and paid proportionately, save for other provisions stipulated in the contract.
b. Second Half of Retention Money shall be certified and paid promptly after the expiry of the Defects Notification Period (or Maintenance Period or other similar term), save for the provisions for Section or Part of the Works. Retention Money for Section or Part of the Works shall be certified and paid proportionately, save for other provisions stipulated in the contract.
For clarification, I understand based on your question that you are working under Main Contractor and you are seeking advice related to the Release of Last Retention Money for Subcontractor, “Item b” above, assuming you have similar conditions of contract as above in your Subcontract Agreement.
Although your Subcontract Agreement stipulates “the quantities certified for the subcontractor will be according to the quantities certified for the main contractor”, I am puzzled that certification in quantities are associated with Retention Money, wherein this matter should be dealt during Progress Payment. The issue that will supposedly arise during the release of retention is “Due or Not Due”, in your case it is “Due”.
Notwithstanding the foregoing, I advise you to deal this matter in a fair and reasonable manner to both Main Contractor and Subcontractor, by certifying the proportion amount to Subcontractor based on the amount or quantity certified by the Engineer to the Contractor. It is not fair on the part of Subcontractor if the Main Contractor will hold the entire second-half retention money due to small quantities not certified by the Engineer, same as not fair on the part of the Main Contractor to release the entire second-half retention money to the Subcontractor while he receives only portion of it.
I also suggest that the Main Contractor to be open to the Subcontractor of the actual status of disputed quantities. Finally, open communication will be an important tool to maintain trust between parties.
I hope the above advice addresses your concern.
Thank you for your trust.
---------- FOLLOW-UP ----------
QUESTION: Thank you Sir for your very detailed response to my question and I am also clear now, how to deal the issue. For more disucssion on the subject, the issue is that the subcontract agreement was followwed by a supplementray agrement between the main contractor and the subcontractor only for the payment of the retention money and it was agreed to be paid one year after practical completion of the subcontract works. The works were pratically completed on 18th May 2014 and the payment of retention money was agreed on 18th May 2015 (one year was agreed as the defects libility period in the original subcontract agreement). The disputed quantites will be settled accordingly in the final payment certificate for the subcontractor, after certification (or determination) by the Engineer. We as the main contract are obliged to pay the retention money as per the terms of the supplementary subcontract agrement and we will will comply with that. However my question is that if this amount of retention money is to be paid to the subcontractor in the form of an interim payment certificate (next IPC after the previous IPC)or to be directly transferred this amount into the subcontractor's account. And also to advise what is the standard procedure for payment of the retention money to the main contractor accroding to FIDIC 1999 Red Book (in the light of Sub-Clause 14.9). Looking for ward to your guidance. Regards
Thank you for your follow-up question and apology for the late reply. I have been inactive during Ramadan and Eid Holidays.
Let me summarize your questions:
1. How the payment of retention money to Subcontractor be processed (Interim Payment Certificate or Direct Transfer)?
2. Is there a standard procedure for payment of retention money to Main Contractor under FIDIC 1999 Red Book?
Answer for Q1:
Based on your follow-up question, it is safe to assume that you have employed FIDIC 1999 Red Book plus a supplementary agreement to Subcontractor, wherein supplementary agreement is limited only to the terms of releasing the retention money.
With that being established, you are compelled to follow the procedure of FIDIC 1999 Red Book procedure for payment of retention money to subcontractor. Since we are referring to the last retention, we need to adhere to the payment procedure as specified under Sub-Clause 14.11 [Application for Final Payment Certificate].
The direct answer to your Question No. 1 is, the payment of retention money to subcontractor shall be processed through final payment certificate. Not termed as "interim" anymore since this will be the last payment.
Answer for Q2:
Yes. There is a procedure for payment of retention money under FIDIC 1999 Red Book. This procedure is specified under Sub-Clause 14.11 [Application for Final Payment Certificate].
If dispute exist, it shall be resolved under Sub-Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision] or Sub-Clause 20.5 [Amicable Settlement]. After resolution of dispute, the Contractor shall then prepare and submit to the Employer (with a copy to the Engineer) a Final Statement.
I hope this will clear up your questions sufficiently.