You are lending them money at your own expense.

You are lending them money at your own expense

Week 12 followed one month's money from statement to bank account, and listed what comes off on the way. Retention was one line in that list. It deserves a week of its own, because on this job it is roughly the entire profit.

A three percent retention rate on a million-dollar contract, capped at three percent, means the employer holds up to $30,000 of your money. The net margin is $48,163.

At the point of maximum deduction, the sum being held is close to two-thirds of everything you will make. It is cash you earned, on work already done, already paid for in wages and materials. Half comes back when the works are taken over, and the other half at the end of the defects notification period.

What retention is actually for

It is worth being fair about the purpose, because the mechanism is reasonable even where the arithmetic is uncomfortable.

Retention gives the employer something to apply against defects that appear after handover, without having to pursue anybody for it. The two-stage release matches that logic: half at taking over, when the works are substantially complete, and half at the end of the defects period, when the remaining risk has run out.

The rate and the limit both sit in the Contract Data. Rates between three and ten percent are all conventional, and none of them is compulsory, and it is one of the numbers most worth arguing about at tender — because unlike the payment periods, it doesn't merely delay your cash. It holds a fixed lump of it for the whole job.

Three instruments you pay for

Retention is only one of four things securing the employer's position, and you fund all of them.

The performance security is a bank instrument you buy yourself. How much it is for, and in which currencies, comes out of the Contract Data. It goes to the employer — the Engineer gets a copy — and the deadline is twenty-eight days from the letter of acceptance landing. The issuing bank and its jurisdiction both need the employer's consent, and the wording follows the form annexed to the Particular Conditions.

The advance payment guarantee, where there is an advance, secures money paid to you before the work exists, and stays in place until the advance has been recovered through deductions.

And insurance — the only one of the four that pays anything out to anybody when something goes wrong.

There is a second cost to that instrument which rarely reaches the estimate. A performance security ties up part of your banking facility for the whole job, and that facility has a limit. A contractor running four jobs with securities out on all of them has less capacity to bid the fifth, whatever the balance sheet says. The fee is the visible cost; the constraint is the real one.

The security can't be called for anything

One protection worth knowing, because it is more restrictive than most contractors assume.

The employer may not claim under the performance security except for amounts it is actually entitled to under the contract. It isn't a fund available to whoever is annoyed; it secures entitlements that already exist somewhere else in the conditions.

There is a rule running the other way too. Where the contract price increases beyond a stated point, the employer may ask you to increase the security by the same proportion — and if that request costs you money, the contract treats it as though the Engineer had instructed a variation. So an increase in security is a claimable cost, which isn't obvious and is routinely absorbed.

Insurance is a clause, not a policy

Insurance gets skipped by project controls people because it looks like somebody else's department. Two things make it worth ten minutes.

First, you have to effect and maintain the insurances you are responsible for, with insurers and on terms that meet the contract's requirements, and produce the policies whenever the employer asks. That last part is a small obligation right up until the day somebody asks and the broker hasn't issued anything.

Second, and more usefully: what the policy doesn't cover is a cost you carry. Every excess, every exclusion, every sub-limit is a number that lands on the job when something happens. A project with a substantial excess per event and a busy year of small incidents pays for all of them out of margin, and none of it ever appears in a report under the heading of insurance.

Blanks are decisions

Step back from the instruments and there is a pattern this track has now hit four times.

No amount stated for the performance security, and that sub-clause doesn't apply. No indexation schedule, and Week 14's cost adjustment doesn't apply. No exchange rates stated, and the base date rates govern. No programming software named, and it is whatever the Engineer will accept.

Two of those switch a mechanism off completely. Two substitute a default that somebody else's lawyer chose. In every case a blank in the Contract Data is a decision, taken by whoever didn't fill it in and inherited by whoever signs.

That is a different way of reading a contract from the one Week 2 described. There the job was to find the provision that governs. Here it is to find the entries nobody completed, and work out which of them has just made a decision on your behalf.

Practical insight

Build the security schedule for your job. One page, four rows, three columns: what it is, what it costs, when it ends.

For retention, write down the rate, the cap, the expected peak, and the two release dates. Put the peak figure next to your net margin. On a lot of jobs the first number is the larger of the two, and everybody on the commercial team should know it.

For the performance security and any advance guarantee, write the fee — the annual rate against the facility, not just the first invoice — and the date each is due for release. Bonds left in place after they should have expired are a running cost nobody notices, because the fee is small and the review never happens.

For insurance, ask the broker for one page listing the excesses and the main exclusions. That page tells you what a bad day actually costs you, which is the only insurance number a cost engineer needs.

And do the Contract Data sweep. Go through it looking specifically for empty fields, and for each one ask what the conditions do when nobody has filled it in. It is an hour of reading, and it is the cheapest hour in this track.

Key takeaways

✔ At three percent on a $1,000,000 contract, retention peaks around $30,000 — against a net margin of $48,163. A ten percent rate would exceed the margin twice over.

✔ It comes back in two halves: at taking over, and at the end of the defects notification period.

✔ The rate and the limit are Contract Data entries, not fixed features of the contract.

✔ The performance security is at your cost, due within twenty-eight days of the letter of acceptance, from an issuer and jurisdiction the employer consents to.

✔ The employer can only call it for amounts it is genuinely entitled to under the contract.

✔ If the employer requires the security to be increased and that costs you money, the contract treats it as an instructed variation.

✔ A blank in the Contract Data is a decision. Sometimes it switches a mechanism off entirely, and sometimes it substitutes a default you never chose.

What's coming next

Phase E begins by widening the lens. Everything in this track has been read out of one book, and the job has been administered as a Red Book contract throughout. But the same rock, the same haul road and the same late drawing land differently under Yellow and under Silver — different risk allocation, a different person deciding, and in one of them no Engineer at all. Next week we take the events this track has already worked through and run them across all three books, so you can see what the choice of book was actually worth.