Retention Money
The contract clause 60.2 describes that an amount @7.5% will be deducted from every IPC in the head of retention money, however the limit of retention money will be 5% of contract price stated in the letter of acceptance.
But, later on, the contract amount increased due to variation in scope of work, by which revised contract costs differed from the original contract price stated in the letter of acceptance. Now, ambiguity has been raised about what will be the limit of retention money after the revised contract cost:
1. Of contract price = 5,704 x 5% = 285 million
2. Or, of the revised contract price i-e variation order accumulative amount : 6,534 x 5% = 327 million.
In a FIDIC 1987-based contract, clause 60.2 specifies that retention money is deducted from each Interim Payment Certificate (IPC) at a rate of 7.5%, up to a limit of 5% of the contract price stated in the Letter of Acceptance. However, when there is a variation order that increases the contract amount, then "The question arises whether the limit for retention money should be based on the original contract price or the revised contract price after variations, this limit become unclear."
The key question here is whether the retention limit applies to the original contract price or the revised contract price after variations. Generally, this is determined by the specific terms in the contract and any relevant interpretations within FIDIC guidance. Here’s how each option might be analyzed:
If the retention limit is based on the original contract price: The retention money cap would remain at 5% of the original contract price stated in the Letter of Acceptance, or 285 million (5,704 x 5%).
If the retention limit is based on the revised contract price: With the increased contract price due to variation orders, the retention cap could increase to 327 million (6,534 x 5%).
Practical Considerations and FIDIC Interpretation
FIDIC does not explicitly clarify in the 1987 version whether retention money should be recalculated based on variations. In practice, however, the industry often interprets the retention limit to be based on the revised contract price, especially if the variation orders significantly impact the project scope and value. This aligns the retention amount with the actual risk exposure from the increased contract value.
This approach ensures that the retention reflects the total scope and financial commitment of the project, including all variations.
It is advisable to:
- Review any specific contract clauses or amendments that might clarify this, especially in case there are addenda that modify the FIDIC terms.
- Consult the Engineer or Contract Administrator for their interpretation, as they typically have authority over how FIDIC terms apply in the specific context of the contract.
It would be prudent to check the specific language of contract or seek legal advice to confirm the interpretation.
The basic purpose of Retention Money withholding:
Retention money deduction serves several important purposes in construction contracts:
1. Quality Assurance: It acts as a financial incentive for contractors to complete the project to the specified quality and standards. By holding back a percentage of payments, clients ensure that any defects or unfinished work are addressed promptly.
2. Risk Mitigation: Retention money provides a safety net for clients, protecting them from financial risks associated with contractor defaults, poor workmanship, or project delays.
3. Compliance with Contract Terms: It ensures that the contractor complies with all terms and conditions of the contract, including post-completion obligations such as maintenance and correction of defects during the defect’s liability period.
4. Financial Stability: It promotes financial discipline among contractors, encouraging them to manage their resources efficiently and complete projects on time.
Overall, retention money provides the employer with some leverage over the contractor, promoting quality, completion, and compliance with the project specifications.
Retention money is typically released in stages, with a portion returned upon project completion and the remainder after a specified defects liability period, ensuring all issues are resolved to the client's satisfaction.
