Retention and a new contractor's cash flow
Why clients hold back retention from new contractors more readily, how to negotiate terms that do not starve the job of cash, and how to plan around it.
By Achekam · · 5 min read · For Construction businesses in South Africa, Nigeria, Kenya
A young building company wins its first sizeable contract: a clinic extension, a school block, a set of townhouses. The price is fair and the margin looks healthy. Then the first payment arrives, and it is short. The client has held back retention, as the contract allows, and will do so on every payment until the job is finished and the defects period has run.
For an established contractor with cash in the bank, retention is an irritation. For a new one, it can decide whether the business survives the job. Suppliers and labour still need paying in full each month, while part of every payment for the work sits with the client.
What retention is, and what it can add up to
AccountingTools explains that retainage, as retention is called in some markets, is typically 10% of the contract price, and that it may comprise the contractor's entire profit on the job. That is what makes it a powerful incentive to finish the project the way the client wants. AccountingTools sets this out in its explanation of retainage, including how and when it is released.
Think about what that means. If the retention equals your margin, then every month of the job you are paying out your full costs and receiving back only your costs. The profit arrives at the very end, if everything goes well. Until then, the job earns you nothing in cash.
ACCA makes the wider point in its guidance on cash budgets: a healthy profit does not necessarily mean healthy cash flow, because labour, materials and overheads may have to be paid before the cash from sales arrives. Retention stretches that gap further still.
Why new contractors face it more often
AccountingTools notes that clients are more likely to impose retention on a new contractor, and less likely to when a project must be completed in an unusually short time.
The logic is simple from the client's side. A contractor with no track record is an unknown risk, and money held back is the client's protection if the work is poor or the contractor walks away. The exception is also telling: when a client needs a job done fast, it cannot afford to put off contractors with harsh terms.
So a new contractor should expect retention, budget for it from the tender stage, and look for chances to negotiate it, particularly on urgent work.
Negotiating retention that does not finance the project
AccountingTools advises that retention should not be so large that the contractor is forced to finance the project. That gives you a principle to negotiate with. Points to raise before signing:
- The rate and a cap. Ask whether retention can stop once a set total has been held, rather than continuing on every payment to the end.
- Release in stages. Ask for part of the retention to be released at practical completion, with the rest held only for the defects period.
- An alternative to cash. Some clients accept a retention bond or a bank guarantee instead of holding cash. It has a cost, but it can free money the job needs.
- Prompt payment of what is due. Retention is easier to carry when the rest of each payment arrives on time.
- Clear release conditions. Write down exactly what triggers each release, and who decides.
Even a small improvement in timing makes a real difference to a contractor whose margin is tied up in retention.
Defects can keep retention held
AccountingTools explains that if the final inspection finds problems with the contractor's work, the client continues to hold the retention until they are put right.
For a new contractor, this is where cash can be lost for months. Snags left unresolved at handover, a missing compliance certificate from a subcontractor, or a dispute about whether a crack is a defect can all delay release. Plan the close-out like a project of its own: walk the job with your own snag list before the client's inspection, collect every document the client will ask for, and give one person responsibility for closing each item.
Planning cash around retention in Achekam
Retention needs to be visible in your plans and your books, not just in the contract.
In the budget. A business can set a budget per account and period in Achekam and compare it with actual figures from its ledger. Budget the job's costs month by month, and set them against the cash you will actually receive after retention, not the value of work done. That shows how much funding the job needs at its tightest point.
On the invoices. Progress invoices are created as drafts that can be changed or deleted, and issuing one takes the next number in the sequence and posts it to the ledger as debtors, sales and output VAT. Agree with your accountant how retention is shown: for example, moving the retention amount by manual journal into its own retention receivable account, so that ordinary debtors and retention can be followed separately. Achekam refuses a journal that does not balance or is dated in a closed month, and a posted journal is corrected only by reversing it.
In the ageing. Receivables are aged into 0-30, 31-60, 61-90, 91-120 and over 120 days, with overdue totals. Retention that is not due until the defects period ends can look like an old, overdue debt if it sits with ordinary invoices. Separating it keeps your collections focus on what is really late.
Following up once the defects period ends
Retention is your money once the conditions are met, but clients rarely release it without being asked. Diarise the end of every defects period when the contract is signed. A month before, check that every defect has been closed and documented. On the day, send the request for release with the evidence attached, and follow it up as firmly as any other overdue account.
Before the next tender
Price retention into your cash plan at tender stage, negotiate its rate and release from the first meeting, and give someone the job of chasing every release date. For keeping retention out of ordinary arrears, see retention not chased as overdue, and for closing out the job's money, reconciling the final account.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
