If you are a contractor or involved in the construction industry, you may have come across the term “contract price retention clause.” This clause is a critical element of any construction contract, and it can have a significant impact on the financial health of your business. In this article, we will discuss what a contract price retention clause is, how it works, and why it is essential to understand its implications.
What is a Contract Price Retention Clause?
A contract price retention clause is a provision in a construction contract that allows the client to withhold a percentage of the contract price until the contractor completes the work to the satisfaction of the client. This amount, typically a percentage of the contract price, is held back by the client until the project is completed to the agreed-upon standards, and any defects or outstanding issues are resolved.
How does it work?
When a construction project is completed, and the contractor has satisfied the client`s requirements, the client will release the retention amount to the contractor. The retention amount is usually held in an escrow account or a retention bond until the specified date when it is due to be released. This date is usually linked to the expiration of the warranty period or the completion of any snagging works.
Why is it important?
The contract price retention clause is a crucial element of a construction contract as it protects the client`s interests and ensures that the work is completed to the required standard. However, it can also have significant financial implications for the contractor. As the retention amount is withheld until the project is complete, contractors may experience cash flow issues if they rely on timely payment to cover their expenses and overheads.
In some cases, contractors may also have to provide a retention bond to the client, which can be costly. The bond is typically a percentage of the contract price and is issued by a bank or insurance company, providing security to the client that the retention amount will be paid in the event of the contractor`s insolvency.
In conclusion, the contract price retention clause is a critical provision in any construction contract. It serves to protect the interests of both the client and the contractor, ensuring that the work is completed to the required standard. However, it is important for contractors to understand its implications and to plan for potential cash flow issues. By doing so, they can mitigate the risks associated with this clause and ensure a successful project outcome.