Understanding Retention Amounts in Construction
Understanding Retention Amounts in Construction Contracts Under South African Law
What Are Retention Amounts in Construction?
Understanding retention amounts in construction is key to grasping the balance of power, risk, and responsibility between contractors and employers. In essence, retention amounts refer to a percentage of the payment withheld by the employer from the contractor under the construction contract. This withheld portion acts as a form of security to ensure that the contractor completes the work satisfactorily and remedies any defects within the stipulated period.
Retention money in construction typically ranges between 5% to 10% of the contract value. It is commonly applied across both interim and final payments and held until the works reach practical completion and beyond, into the defects liability period.
In South African law, retention amounts are regulated by contract, often using standard forms such as the JBCC (Joint Building Contracts Committee) or FIDIC (International Federation of Consulting Engineers) suites. These standard contracts lay out when retention is to be withheld and when it must be released.
The Purpose of Retention Amounts in Construction
Understanding retention amounts in construction requires recognizing their primary function: risk mitigation. Employers are vulnerable to poor workmanship, abandonment of the project, or defects arising after completion. Retention money in construction gives the employer leverage to ensure that any latent issues are resolved before the final payment is made.
In Murray & Roberts Construction (Cape) (Pty) Ltd v Upington Municipality 1984 (1) SA 571 (A), the court acknowledged the protective intention of retention, stating that it encourages contractors to meet performance standards and complete defect rectifications.
Retention also deters early termination by contractors. Should they abandon the site, the employer has some funds on hand to procure completion through alternate means.
JBCC Retention Rules in South Africa
Understanding retention amounts in construction is impossible without reviewing the JBCC rules, as these are widely used in South African private sector projects. Clause 32 of the JBCC Principal Building Agreement (PBA) 6.2 regulates the retention process.
According to JBCC:
- Retention is usually 5% of each interim payment.
- Half of the retention amount is released upon practical completion.
- The balance is released after the expiry of the defects liability period (typically 3 months), provided all outstanding work and defects are resolved.
These JBCC retention rules in South Africa are fair to both parties, offering employers security while ensuring contractors are eventually paid in full.
FIDIC Retention Provisions and International Perspective
Understanding retention amounts in construction extends to international practices. Under the FIDIC Red Book (Clause 14.9), the employer is required to release the first portion of the retention upon issuing the Taking Over Certificate and the final amount upon the expiry of the Defects Notification Period.
Although South African law does not mandate FIDIC usage, public sector projects occasionally adopt it, especially where international funding or consultants are involved.
Legal Requirements for Releasing Retention Amounts in Construction
Understanding retention amounts in construction includes clarity on their lawful release. Withholding retention beyond the agreed dates may constitute a breach of contract and unjust enrichment.
In Blue Circle Projects (Pty) Ltd v Nkwe Platinum Ltd 2010 JDR 0906 (GSJ), the court held that retention money must be released in accordance with the agreed contractual milestones unless justified by specific performance failures.
If the defects liability period has expired and no defects are outstanding, the employer must release the retention amount without delay. Failure to do so allows the contractor to claim interest and, if necessary, initiate legal proceedings.
Contractor Rights on Retention Amounts in Construction Contracts
Understanding retention amounts in construction also involves knowing contractor rights. Contractors are entitled to full payment, including retention, if they:
- Complete the works per contract specifications.
- Remedy all notified defects within the defects liability period.
If employers delay retention release without contractual justification, they can be compelled to pay. The Contractual Damages principle in Holmes v Goodall & Williams Ltd 1936 AD 388 supports this position: damages can be claimed for breach if the retention is unfairly withheld.
Contractors should keep records, defect lists, and communications documenting performance and requests for release. These documents form evidence if they need to claim the balance legally.
Common Issues in Withholding Retention Unlawfully
Understanding retention amounts in construction helps identify common employer misconduct. Among these are:
- Vague reasons for withholding
- No issued defect list
- Delays in inspections
- New conditions added post-completion
Withholding retention unlawfully may also contravene Section 48 of the Consumer Protection Act 68 of 2008, which prohibits unfair contractual terms and practices.
Where the retention release clause is clear and performance confirmed, any non-compliance may be challengeable in court.
Remedies Available to Contractors for Unlawful Retention
Understanding retention amounts in construction also means exploring legal remedies. If retention is withheld unlawfully, a contractor can:
- Demand payment via letter of demand.
- Refer the dispute to adjudication or arbitration if the contract provides.
- Sue for breach of contract and claim damages.
In Esor Africa (Pty) Ltd v Bombela Civils JV [2013] ZAGPJHC 113, the court recognised the enforceability of interim and final certificate entitlements and ordered the release of outstanding amounts, including retention.
These cases confirm that contractors are not helpless. They can assert contractor rights on retention through legal avenues.
Retention Release Clauses: What to Look Out For
Understanding retention amounts in construction includes reviewing retention release clauses carefully. These clauses define:
- Timing of release
- Conditions to be fulfilled
- Certifications required
Poorly worded clauses may lead to disputes. For instance, conditional phrases like “subject to employer satisfaction” may be interpreted subjectively. Contractors must negotiate clear, measurable conditions such as “on completion of the defects liability period and resolution of all listed defects”.
Well-drafted JBCC or FIDIC contracts already provide this clarity. But amendments should be reviewed legally before signing.
Industry Trends and Calls for Reform
Understanding retention amounts in construction must consider broader calls for reform. Delayed payments and abusive retention practices have prompted industry criticism.
The Construction Industry Development Board (CIDB) and Master Builders South Africa have called for capped retention amounts, interest penalties on delayed release, and more standardised enforcement.
While not yet legislated, these developments signal growing recognition that contractors need better protection from financial risk caused by retention abuse.
The Future of Retention Practices in South Africa
Understanding retention amounts in construction leads us to the likely evolution of the law. There are moves towards:
- Digital certificates and automated release tracking
- Escrow accounts for retention money
- Legal reform mandating maximum holding periods
Whether through legislation or contract reform, fairer retention practices are becoming central to sustainable construction sector development.
Frequently Asked Questions About Understanding Retention Amounts in Construction
What is retention money in construction? Retention money is a percentage of the contract payment withheld by the employer to ensure the contractor completes all work and rectifies any defects.
Is it legal to withhold retention money without a written agreement? Generally not. Without a contract provision, withholding retention could be unlawful and challengeable under general principles of contract law.
When must retention be released under JBCC? Half is released upon practical completion and the other half after the defects liability period, provided all defects are remedied.
Can a contractor claim interest on delayed retention payments? Yes. Courts have awarded interest on delayed payments where the employer withheld retention unlawfully or beyond contractually agreed periods.
How does the FIDIC contract handle retention? FIDIC provides for staged retention release: at the issuance of the Taking Over Certificate and after the Defects Notification Period.
What are my rights if retention is withheld unfairly? You may send a demand, refer the issue to adjudication or arbitration, and even sue for breach of contract and damages.
Is there a maximum legal percentage for retention in South Africa? No statutory cap exists, but 5% is standard. Larger amounts may be considered unreasonable in certain contexts.
What happens if defects appear after retention is released? If the retention is fully released and no latent defect clause applies, the employer may have limited recourse unless gross negligence or fraud is shown.
Can a contractor negotiate different retention terms? Yes. Contractors can propose reduced percentages or alternative security like performance bonds.
Is retention money held in trust? Not automatically. Unless agreed otherwise or held in escrow, retention forms part of the employer’s general funds.
References
| Authority | Citation | Substance & Importance |
|---|---|---|
| Murray & Roberts v Upington Municipality | 1984 (1) SA 571 (A) | Establishes the protective purpose of retention and how it incentivises proper completion. |
| Blue Circle Projects v Nkwe Platinum | 2010 JDR 0906 (GSJ) | Retention must be released according to contract unless there is a justifiable reason. |
| Holmes v Goodall & Williams | 1936 AD 388 | Supports claim for damages where unjustified withholding occurs. |
| Esor Africa v Bombela Civils JV | [2013] ZAGPJHC 113 | Enforces certificate-based payment and retention release obligations. |
| Consumer Protection Act | Section 48, Act 68 of 2008 | Prohibits unfair terms; relevant to employer overreach in withholding retention. |
Useful Links
- Joint Building Contracts Committee (JBCC): Access JBCC contract documents and updates.
- FIDIC Official Website: Source for international construction contracts and best practices.
- Construction Industry Development Board: Industry insights and calls for reform around payment practices.
If your query is about how to amend a contract click here.
If you would like to know more about the inter-play between novation and cancellation click here.
If you would like a more in-depth article about the cancellation of contracts click here.
If you would like to know more about the requirements for payout of a guarantee, click here.
If you would like to know more about the authority to sign documents of security click here.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for errors, omissions, loss, or damage arising from reliance upon any information herein. Don’t hesitate to contact Meyer and Partners Attorneys Incorporated if you require further information or specific and detailed advice. Errors and omissions excepted (E&E).
