Your Contractual Questions Answered

Your Contractual Questions Answered.

Entrusty Group, a multi-displinary group of companies, of which, one of their specialisation is in project, commercial and contractual management, has been running a regular contractual questions and answers section for Master Builders members in the Master Builders Journal.

In this instalment of this series, Entrusty Group will provide the answer to the frequently asked question - When must retention sum be released and paid ?

Most if not all construction contracts used around the world usually have provisions for the retention of a certain amount of monies due to the Contractor by the Employer. This retention sum is normally retained by the Employer throughout the contract period and usually beyond the construction period up to the expiry of the defects liability period.

Release of the retention sum is usually done in two portions. The first, called the one moiety, where half the retention sum is usually released with the issuance of the Certificate of Practical Completion and the remainder is usually released after expiry of the defects liability period and the issuance of Certificate of Making Good Defects by the Architect/Engineer/SO.

Retention sums however, may be subjected to set-off by the Employer in accordance with the provisions in the contract.

Standard Forms of Contract (Relevant Clauses)

PAM Form of Building Contract

Under PAM 98’s Clause 30.4 (69 – Cl.30(3)), it allows the Employer to retain a percentage of the total value of works, materials or goods as retention monies. The said percentage is stated in the Appendix as Percentage of Certified Value Retained. If none stated, it shall be not exceeding 10 % of contract sum.

When the total amounts retained equals to the amount of Limit of Retention Fund or such reduced amount due to Employer’s possession of the relevant part (Sub-clauses 16.1 (vi) & 16.1 (vii)) and/or NSC’s final payment (Clause 27.6), then no further amounts shall be retained.

Sub-clause 30.5 (iii) (69 – S/Cl. 30 (4) (b)) requires the Architect to issue a Certificate for the release of one moiety or half of the total amount retained upon issuance of the Certificate of Practical Completion. Whilst, Sub-clause 30.5 (iv) (69 – S/Cl.30(4)(c) requires the Architect to issue a Certificate for the residue or remaining amounts retained on expiry of the Defects Liability Period stated in the Appendix or on issuance of the Certificate of Completion of Making Good Defects, whichever is the later.

In both cases, the Contractor is then entitled to payment within the Period of Honouring Certificates stated in the Appendix.

JKR/PWD Form of Contract (203A – Rev 10/83)

MBAMQuest6 © 1/3 There is no provision for retention monies under JKR Form of Contract. This is the only main form of contract used in Malaysia that does not have retention provision. The security used under the JKR Form is the Performance Bond.

IEM Conditions of Contract

The provision for retention monies under IEM Form is similar to PAM.

Clause 47 (e) is similar to PAM clause 30.4 on the percentage and limit of retention. Whilst clause 47 f(ii) is similar to PAM clause 30.5(iii), where the Engineer is to issue a Certificate for the release of one half of the total amount retained on issuance of the Certificate of Practical Completion.

Clause 47 f(iii) is the equivalent of PAM Clause 30.5(iv), where the Engineer is to issue a Certificate for the release of the remaining amount of the retention on the issue of the Certificate of Making Good Defects.

In both cases, the Contractor is then entitled to payment within the number of days as stated in the Appendix of the Conditions.

CIDB Form of Contract for Building Works

The provision for retention monies under CIDB Form is very similar in many respects to the PAM and IEM forms.

Clause 42.3 (a) (b) are similar to PAM Clause 30.4 on the percentage and limit of retention and clause 42.3 (c)(iv) is similar to PAM clause 30.5(iii), except the SO can issue an Interim Certificate certifying the release of one half of the total amount of Retention Monies retained on issuance of the Certificate of Practical Completion.

Whilst clause 42.3(c)(v) is similar to PAM clause 30.5(iv), except the SO is to issue an Interim Certificate certifying the release of the remaining amount retained on expiry of Defects Liability Period or the issue of the Certificate of Making Good Defects, whichever is later or include the same in the Final Certificate (whichever is appropriate).

Clause 42.3(d) cater for items where the Retention Percentage referred above is not applicable, these are:- (i) royalties, damages or other monies payable under Clause 9.1 ; (ii) fees paid in compliance with Statutory Requirements under Clause 10.1; (iii) amounts payable to the Contractor under Clauses 15.4(Cost of Test), 15.6 (uncovering & making opening) and / or 27.5 (searching defects) notwithstanding it is deemed a Variation; (iv) Loss and Expense; and (v) proceeds from any insurance policy or policies under Clause 38A, 38B or 38C, whichever is applicable.

Conclusion/Solution

The provisions in the standard forms of contract are clear as to when the retention monies or sums are to be released. Generally, the first moiety or half of the retention sum (usually limited to 5 percent of contract sum) is released after issuance of Certificate of Practical Completion.

MBAMQuest6 © 2/3 The remaining half of the said retention sum is released on expiry of Defects Liability Period or issuance of the Certificate of Making Good Defects, whichever is the later.

The next issue will be providing the answer to the question, What is Set-Off under Construction Contracts?

The Entrusty Group includes Entrusty Consultancy Sdn Bhd (formerly known as J.D. Kingsfield (M) Sdn Bhd), BK Burns & Ong Sdn Bhd, Pro-Value Management and Proforce Management Services Sdn Bhd. Apart from project, commercial and contractual management services, the group also provides risk, resources, quality and value management and recruitment consultancy services to various industries, particularly in construction and petrochemical, both locally and internationally.

Entrusty Group is currently running ……………….. course on …………………………………. The coming courses are :-

Topic Date – Time – • • • • • •

Those interested can obtain further information from Candy Kwan at the contact details as listed below.

Entrusty Group will provide a 30 minutes of free consultancy with prior appointment to MBAM members on their contractual questions. Kindly contact HT Ong or Wing Ho at 22- 2 Jalan 2/109E, Desa Business Park, Taman Desa, 58100 Kuala Lumpur, Malaysia. Tel: 6(03)-7982 2123 Fax: 6(03)-7982 3122 Email: [email protected]