Some of the hardest hit by the COVID-19 outbreak are our business owners, particularly those in small and medium-sized organisations.
A message from our commercial supporter, Level Playing Field.
Retention money - 2.5% to 5% of your subcontract. Doesn’t sound like much, but how many projects are you losing retention on?
How many subbies are failing to recover their retention money?
This article discusses:
- The validity of retention clauses;
- How to validly claim retention; and
- How to negotiate your retention.
Some key cases regarding retention
Maxcon Constructions Pty Ltd v Vadasz  HCA 5
This was a landmark High Court case that was decided in 2018.
The Building and Construction Industry Security of Payment Act 2002 (VIC) (the SOPA) invalidates contractual clauses that are ‘paid when paid’ provisions. This means that if a contract states that you won’t get paid until the builder gets paid, this is invalid.
The High Court found that a retention clause that is based on the builder’s performance such as the builder’s practical completion is a clause that is void for the purposes of recovery under the Act.
What does this mean for you?
Many retention clauses in subcontracts may be void. Consider if return of retention is based on the builder’s performance. If the clause is void, 100% of retention can be claimed upon your practical completion.
Punton’s Shoes v Citi-Con  VSC 514 (24 August 2020)
This was a Supreme Court case that involved the builder Citi-Con and the developer Punton’s Shoes (PS).
On 26 September 2019, Citi-Con issued PS a payment claim under the SOPA for ONLY the return of 50% of the retention money. It did not claim the balance of the construction works. Citi-Con succeeded in its adjudication application and was awarded $222,750.00. The Adjudicator did not value the construction work, consider defects or the validity of variations because the payment claim ONLY claimed a return of retention money.
PS applied to the Victorian Supreme Court to appeal the Adjudicator’s decision, claiming that a claim for retention is not a claim for ‘construction work.’
Section 5 and 7 of the SOPA state that it applies to claims for ‘construction work.’
The Court found that the return of retention money is not a claim for construction work and therefore cannot provide an entitlement to issue a payment claim under SOPA.
What does this mean?
A payment claim for only retention money may be considered to be invalid under SOPA.
The better approach is to claim 100% completion of construction work and deduct money received so that it is a ‘balancing claim.’
Key points when negotiating retention clauses
- Make the return of retention based on your performance so you know when to claim for retention.
- If the return of the second half of retention is based on the defects liability period, make sure the defects liability period commences on an event under your subcontract such as upon your practical completion.
- Seek advice if you consider that the builder may not return your retention. Ideally, you seek recovery within 3 months from leaving site/within your defects liability period.
Key points in tracking your retention amounts
- Create a spreadsheet tracking retention amounts;
- Write a business process on how you will track and recover retention amounts; and
- We can review your retention spreadsheet to advise when you should be enforcing payment
Protect the retention money that is rightfully yours.
If you would like more information about retention clauses or require general legal advice about construction work, contact Level Playing Field at [email protected]