Posted on 5th May 2023

Subcontractors in the construction industry often face the challenge of managing their cash flow while working on projects. One major factor that can have a negative impact on their cash flow is retentions. In this blog post, we will explore the impact of retentions on cash flow for subcontractors and how they can mitigate these negative effects.

What are Retentions?

Retentions are a form of security for the client that ensures that the subcontractor will complete their work to the agreed standard. It is a portion of the subcontractor's payment, typically 3-5%, that is withheld by the client until the project is completed to the satisfaction of the client. Typically the withheld retentions are released in two portions, 50% at project Practical Completion and the remaining 50% 12 months later.

The Impact of Retentions on Cash Flow

Retentions can have a significant impact on the cash flow of subcontractors. For example, if a subcontractor is working on a project with a contract value of £100,000 and a retention rate of 5%, they will only receive £95,000 as payment for their work. 

This means that the subcontractor has to manage their cash flow with only 95% of revenue in the short-term. This can be particularly challenging for subcontractors who have limited financial resources, as they will still need to pay labour, suppliers, staff, and other overhead costs.

How to Mitigate the Negative Impact of Retentions

There are several ways that subcontractors can mitigate the negative impact of retentions on their cash flow. 

Here are some strategies that subcontractors can consider:

1. Negotiate the retention rate: Subcontractors can negotiate with the client to reduce the retention rate or even eliminate it altogether. This can help to improve their cash flow by allowing them to receive the full payment for their work.

2. Factor the retention into the price: Subcontractors can factor the retention into the price of their work. For example, they can increase their price by 5% to account for the retention. This can help to ensure that they have enough cash flow to cover their expenses.

3. Invoice promptly and accurately: Subcontractors should invoice promptly and follow up on outstanding invoices to ensure timely payment. This can help to ensure that the retention deduction is the only deduction made to their applications or invoices.

4. Use invoice financing: Subcontractors can use invoice financing to get paid for their work immediately. This can help to improve their cash flow and reduce the impact of retentions although this can also negatively impact the subcontractors cashflow and profitability as this will come with a cost.

If you have outstanding retentions on projects and would like some assistance with recovery, or any advice regarding your retentions whatsoever, get in touch by calling our number or emailing us at [email protected].