Understanding Clause 14.9: Mastering Payment of Retention Money in Contracts

Clause 14.9 Payment of Retention Money of the FIDIC Yellow Book 1999 deals with the conditions and timing for the release of retention money to the Contractor. Retention money is a portion of the contract price held back by the Employer to ensure the Contractor completes the Works satisfactorily. Here’s a breakdown of the key aspects of this clause:

1. Release of First Half of Retention Money:
   • Upon issuance of the Taking-Over Certificate for the Works and successful completion of all specified tests (including Tests after Completion, if any), the first half of the Retention Money is certified for payment to the Contractor.
   • If a Taking-Over Certificate is issued for a Section of the Works, a corresponding percentage of the first half of the Retention Money is certified and paid once that Section passes all tests.
2. Release of Second Half of Retention Money:
   • The remaining balance of the Retention Money is certified for payment promptly after the latest expiry dates of the Defects Notification Periods.
   • For Sections with separate Taking-Over Certificates, the relevant percentage of the second half of the Retention Money is paid after the expiry of the Defects Notification Period for that Section.
3. Withholding Certification for Pending Work:
   • If work remains to be executed under Clause 11 (Defects Liability) or Clause 12 (Tests after Completion), the Engineer can withhold certification of the estimated cost of this work until its completion.
4. Percentage Value for Sections:
   • The percentage value for each Section, as stated in the Appendix to Tender, determines the amount of Retention Money to be released.
   • If the percentage value of a Section is not stated in the Appendix to Tender, no part of the Retention Money is released for that Section under this Sub-Clause.

What is Retention Money?

In the context of construction contracts, such as those governed by FIDIC terms, retention money is a portion of the payment due to the contractor that is withheld by the employer. This withholding acts as a financial incentive to ensure the contractor completes all the work to the required standard and resolves any defects. Under Clause 14.9 of the FIDIC Yellow Book (1999 Edition), retention money is released in two halves: the first after the issuance of the Taking-Over Certificate and the completion of specified tests, and the second after the expiry of the Defects Notification Periods.

What is Retention Money in Construction Contracts?

The purpose of retention money in construction contracts is to provide security against any defects or failures that might emerge during the Defects Liability Period. It’s a form of risk management, ensuring that the contractor has a vested interest in maintaining the quality and integrity of the work even after completion. This practice addresses the inherent asymmetry of information and power in construction projects, where the employer might otherwise struggle to enforce quality standards after paying the full contract price.

What is Retention Money in Cost Accounting?

From a cost accounting perspective, retention money represents a contingent liability for the contractor and a contingent asset for the employer. It’s recorded in the financial statements accordingly. This accounting treatment underscores the uncertainty associated with the completion and satisfactory performance of the contracted work. For the contractor, it’s a delayed receivable, while for the employer, it’s a safeguard against future expenses for repairs or completion.

What is the Duration for Holding Retention Money?

The duration for which retention money can be held is contractually determined. In the FIDIC Yellow Book (1999 Edition), the first half of the retention money is released upon successful completion and testing of the Works or a Section thereof, while the second half is released after the expiry of the Defects Notification Periods. This period is critical as it allows time for any defects to manifest and be rectified. The exact duration is project-specific and is agreed upon in the contract terms, reflecting the nature of the work and the perceived risks involved.

Process Flow:

1. Application for Interim Payment Certificates (Clause 14.3):
   • The contractor submits detailed statements, at intervals defined in the contract (usually monthly), for the work executed.
   • The statement includes various items, such as the value of work executed, adjustments for changes in legislation and cost, and the amount to be deducted for retention.
2. Repayment Amortization Rate of Advance Payment (Clause 14.2(b)):
   • The advance payment made to the contractor is to be repaid at a rate of 25% of the amount of each IPC.
   • This means that with every IPC, 25% of the amount will be dedicated to repaying the initial advance payment given to the contractor for mobilization and design.
3. Percentage of Retention (Clause 14.3(c)):
   • 10% of each IPC is deducted as retention money.
   • This deduction continues until the total retention money reaches the specified limit.
4. Limit of Retention Money (Clause 14.3(c)):
   • The limit is set at 3% of the Accepted Contract Amount, excluding Provisional Sums.
   • Once the total retention money reaches this 3% limit, no further retention deductions are made from subsequent IPCs.

Practical Application:

• In each IPC, 25% is deducted to repay the advance payment and 10% is deducted as retention money.
• Once the retention money accumulates to 3% of the Accepted Contract Amount, the retention deduction stops, but the repayment of the advance payment continues at 25% per IPC.
• This structure ensures that the contractor is motivated to maintain quality (through retention) while also gradually repaying the initial financial support provided by the employer (advance payment).

This approach balances the immediate financial needs of the contractor with the long-term assurance of quality and contract fulfillment for the employer. It’s a methodical way to manage cash flow, risk, and project quality in line with FIDIC contract principles.

Here is a sample table illustrating how Interim Payment Certificates (IPCs) might look in a construction contract, along with the deductions for advance payment repayment and retention:

IPC No.	IPC Amount ($)	Advance Payment Repayment (25%) ($)	Retention Deduction (10%) ($)	Net Payment After Deductions ($)	Total Retention Accumulated ($)	Balance of Advance Payment ($)
1	100,000	25,000	10,000	65,000	10,000	75,000
2	100,000	25,000	10,000	65,000	20,000	50,000
3	100,000	25,000	10,000	65,000	30,000	25,000
4	100,000	25,000	10,000	65,000	30,000 (capped at 3%)	0
5	100,000	0 (fully repaid)	10,000 (no further deductions)	90,000	30,000 (capped at 3%)	0

In this example:

• The contract’s total value is assumed to be $1,000,000, making the retention limit 3% of this amount ($30,000).
• Each IPC is for $100,000.
• 25% of each IPC is deducted for the repayment of the advance payment until it’s fully repaid.
• 10% of each IPC is deducted for retention until the total retention reaches the 3% cap of the contract value.
• The “Net Payment After Deductions” column shows the amount paid to the contractor after deductions.
• Once the retention reaches the cap (3% of the contract value, or $30,000 in this case), no further retention is deducted.
• The “Balance of Advance Payment” is reduced by the repayment amount in each IPC until fully repaid.

This table provides a simplified view of how deductions from IPCs might be managed in a FIDIC-based construction contract.

Purpose and Implications

1. Financial Security for the Employer:
   • The clause serves as a financial safeguard for the Employer, ensuring that the Contractor completes the Works satisfactorily and addresses any defects.
   • Retention money acts as a form of security deposit, incentivizing the Contractor to fulfill all contractual obligations.
2. Cash Flow Management for the Contractor:
   • From the Contractor’s perspective, this clause provides a clear timeline for when they can expect the release of withheld funds, aiding in cash flow management.

Primary Aspects

1. Staged Release of Funds:
   • The clause stipulates a two-stage process for releasing retention money: half upon issuance of the Taking-Over Certificate and successful completion of tests, and the remaining half after the expiry of the Defects Notification Periods.
2. Conditional Release:
   • Release of funds is conditional upon the satisfactory completion of the Works and any required tests, as well as the resolution of any defects.

Uses

1. Incentivizing Quality and Timely Completion:
   • The clause is used to motivate the Contractor to complete the Works to the required standards and within the specified timeframes.
2. Risk Management:
   • It serves as a risk management tool for the Employer, providing a financial recourse in case of non-compliance or poor performance by the Contractor.

Expert Opinion

1. Balance of Interests:
   • Experts often view this clause as a balanced approach to protecting the interests of both the Employer and the Contractor. It ensures the Employer has leverage to enforce contract compliance while also providing the Contractor with a clear path to receiving full payment.
2. Importance of Clear Definitions:
   • Legal and contractual experts emphasize the importance of clearly defining terms like “Defects Notification Periods” and “Taking-Over Certificate” within the contract to avoid disputes.
3. Potential for Dispute:
   • There is a recognition that disputes may arise regarding the condition of the Works at the time of taking over, and the clause provides a framework for resolving such issues.

Interaction of Clause 14.9 with Other Clauses in the FIDIC Yellow Book 1999:

Interaction with Clause 11 [Defects Liability]

• Direct Connection: Clause 14.9 explicitly references Clause 11, stating that retention money can be withheld if work under the Defects Liability clause remains unexecuted.
• Implication: The Contractor’s obligation to rectify defects directly impacts the release of retention money.
• Varied Phrasing: “Retention money release is contingent upon the satisfactory completion of obligations under the Defects Liability clause.”

Interaction with Clause 12 [Tests after Completion]

• Conditional Release: Similar to Clause 11, Clause 14.9 ties the release of retention money to the completion of tests mandated under Clause 12.
• Effect: The Contractor must successfully complete all post-completion tests to access the full retention amount.
• Varied Phrasing: “Completion and success of post-completion tests are prerequisites for the full disbursement of retention funds.”

Interaction with Clause 10 [Employer’s Taking Over]

• Trigger for Payment: The issuance of the Taking-Over Certificate under Clause 10 initiates the process for releasing the first half of the retention money.
• Shared Effect: The Contractor’s right to the first tranche of retention money is activated by the Employer’s formal acceptance of the Works.
• Varied Phrasing: “The Contractor’s entitlement to half of the retention money is activated by the Employer’s formal acknowledgment of the work’s completion.”

General Interaction with Payment Clauses (e.g., Clause 14.3, 14.6)

• Part of Payment Mechanism: Clause 14.9 is an integral part of the overall payment framework in the FIDIC contract, interacting with other payment-related clauses to govern the flow of funds.
• Cumulative Effect: The release of retention money complements interim and final payments, ensuring a comprehensive payment structure.
• Varied Phrasing: “Retention money disbursement complements interim and final payments, forming a holistic payment structure in the contract.”

Interaction with Appendix to Tender

• Reference to Contract Data: The Appendix to Tender, which includes specific contract data, is referenced in Clause 14.9 for determining the percentage value of Sections for retention money release.
• Dependence on Contract Specifications: The specifics of retention money release, especially for different Sections of the Works, depend on the details outlined in the Appendix to Tender.
• Varied Phrasing: “The specifics of retention money release, particularly for segmented projects, are dictated by the contractual details in the Appendix to Tender.”

Key Points for Employing Clause 14.9 (Payment of Retention Money) in FIDIC Yellow Book 1999:

1. Understanding the Two-Stage Release Process:
   • Recognize that the retention money is released in two stages: half upon issuance of the Taking-Over Certificate and the rest after the expiry of the Defects Notification Periods.
2. Compliance with Defects Liability and Testing Requirements:
   • Ensure all obligations under Clause 11 (Defects Liability) and Clause 12 (Tests after Completion) are fulfilled, as these directly impact the release of retention money.
3. Awareness of Conditions for Withholding Funds:
   • Be aware that the Engineer is entitled to withhold certification of the estimated cost of any remaining work under Clause 11 or Clause 12 until it is executed.
4. Importance of the Taking-Over Certificate:
   • Understand that the issuance of the Taking-Over Certificate is a critical trigger for the release of the first half of the retention money.
5. Contract Specifics in the Appendix to Tender:
   • Pay attention to the Appendix to Tender, as it contains crucial details about the percentage value of Sections relevant to the release of retention money.
6. Timely Submission of Required Documents:
   • Ensure timely submission of all necessary documents and compliance with the contractual timelines to avoid delays in the release of retention money.
7. Anticipating Cash Flow:
   • Plan for cash flow management, considering the staged release of retention money and its impact on the financial planning of the project.
8. Dispute Resolution Awareness:
   • Be prepared for potential disputes related to the condition of the Works at the time of taking over and understand the mechanisms for resolving such disputes.
9. Contractual Integration:
   • Recognize that Clause 14.9 is part of a larger contractual framework and interacts with other clauses, affecting overall project execution and payment.
10. Risk Management:
    • View the retention money as a risk management tool, balancing the Contractor’s need for payment against the Employer’s need for quality assurance.

Flowchart

Detailed Explanation:

1. Start: Completion of Works (Pink)
   • This initial step, marked in pink, signifies the completion of the construction works under the contract. It’s a crucial milestone that triggers the subsequent steps in the retention money payment process.
2. Issuance of Taking-Over Certificate (Green)
   • The yellow block represents the formal acceptance of the Works by the Employer, evidenced by the issuance of the Taking-Over Certificate. This certificate is a key document that confirms the Employer’s satisfaction with the Works as per contract specifications.
3. First Half of Retention Money Released (Yellow)
   • Another yellow block, indicating the release of the first half of the retention money to the Contractor. This step is contingent upon the issuance of the Taking-Over Certificate and signifies a partial financial closure of the project.
4. Defects Liability Period (Blue)
   • Shown in blue, this period is critical for identifying and rectifying any defects in the Works. The Contractor is responsible for fixing these issues, ensuring that the Works meet the agreed standards.
5. Completion of Defects Liability Period (Green)
   • This yellow block marks the end of the Defects Liability Period. If no defects are identified or all identified defects have been rectified, the process moves to the next step.
6. Second Half of Retention Money Released (Yellow)
   • The release of the remaining retention money, shown in yellow, is a significant financial step, indicating near completion of all contractual payment obligations.
7. Full Payment to Contractor (Pink)
   • The pink block represents the final payment to the Contractor, concluding the financial transactions under the contract.
8. Defects Identified (Alternative Path) (Blue)
   • If defects are identified (blue block), the release of the second half of the retention money can be withheld until these are rectified.
9. Withhold Retention Money (Blue)
   • The Engineer may withhold the retention money (blue block) until the identified defects are rectified, ensuring compliance with contract standards.
10. Defects Rectified (Blue)
    • Once the defects are rectified (blue block), the withheld retention money is released, leading back to the main flow.
11. Interim Payments (Pink)
    • Parallel to the retention money process, interim payments (pink block) may be made as per other payment clauses in the contract.
12. End of Contractual Financial Obligations (Yellow)
    • The final step (yellow block) marks the end of all financial transactions under the contract, signifying the closure of the project’s financial aspects.

Step-by-Step Explanation

1. Contractor Submits Statement at Completion to Engineer
   • The process begins with the Contractor preparing and submitting the Statement at Completion to the Engineer. This statement includes detailed information about the work done and any additional sums the Contractor considers due.
2. Engineer Requests Additional Information (If Needed)
   • Upon reviewing the Statement, the Engineer may request additional information or clarification from the Contractor if certain aspects of the statement are unclear or require verification.
3. Contractor Provides Additional Information
   • The Contractor responds to the Engineer’s request by providing the required additional information or clarification.
4. Engineer Issues Interim Payment Certificate to Employer
   • After reviewing the Statement and any additional information, the Engineer issues an Interim Payment Certificate to the Employer. This certificate specifies the amount deemed payable to the Contractor.
5. Employer Makes Payment Based on Certificate
   • The Employer processes the payment to the Contractor based on the amount specified in the Interim Payment Certificate.
6. Contractor Completes Remaining Work Under Clauses 11 and 12
   • Parallel to the payment process, the Contractor completes any remaining work required under Clause 11 (Defects Liability) or Clause 12 (Tests after Completion).
7. Employer Releases Remaining Retention Money
   • Once the Contractor completes the remaining work satisfactorily, the Employer releases the remaining Retention Money to the Contractor.

Structured Checklists

Checklist 1: Proficient Execution of Clause 14.10

Task	Description	Responsible Party	Completion Indicator
Prepare Statement at Completion	Compile all work done and sums due as per contract	Contractor	Statement prepared and ready for submission
Review Contract Requirements	Ensure all contract stipulations are met in the statement	Contractor	Compliance with contract terms verified
Submit Statement to Engineer	Officially submit the completed statement	Contractor	Statement submitted and acknowledged by Engineer
Engineer’s Review	Assess and verify the submitted statement	Engineer	Review completed; additional information requested if needed
Provide Additional Information	Respond to Engineer’s request for clarification	Contractor	Additional information provided and acknowledged
Issue of Interim Payment Certificate	Engineer to issue certificate based on statement	Engineer	Certificate issued and sent to Employer
Process Payment	Employer to make payment as per certificate	Employer	Payment processed and sent to Contractor
Complete Remaining Work	Address any remaining work under Clauses 11 and 12	Contractor	Work completed and verified

Checklist 2: Applying and Overseeing Clause 14.10

Step	Action Item	Notes
1	Contractor prepares Statement at Completion	Include all relevant work and sums due
2	Submit statement to Engineer for review	Ensure timely submission
3	Engineer reviews and requests additional info if needed	Prompt response to requests
4	Contractor provides any additional information	Ensure clarity and accuracy
5	Engineer issues Interim Payment Certificate	Based on the reviewed statement
6	Employer processes payment	As per the issued certificate
7	Contractor completes any remaining work	Under Clauses 11 and 12

Checklist 3: Monitoring Execution of Clause 14.10

Activity	Checkpoint	Status (✓/✗)	Remarks
Statement Preparation	Accurate and comprehensive
Submission to Engineer	Timely and complete
Engineer’s Review	Comprehensive assessment
Additional Information	Provided if requested
Payment Certificate	Issued by Engineer
Payment Processing	Conducted by Employer
Remaining Work Completion	As per contract requirements

Read Also:

Breach of Contract Types, Breach of Contract definition, Understanding Breach of Contract in FIDIC Agreements, Understanding Liquidated Damages: A Deep Dive into FIDIC’s Clause 8.7, Mastering Clause 15.5: Navigating Employer’s Entitlement to Termination in Construction Contracts