Managing Retention In Residential Building Projects

Project and Seminar Material for Building Technology BT

Managing Retention In Residential Building Projects


Abstract


Residential building projects consist of complex interrelated subsystems of cost centers which often require huge financial commitment. The huge financial commitment therefore makes monitoring the disbursement and flow of financial resources a worthwhile task. Therefore in order to maximize fund on various cost centers, client and project actors often exhibits restraint in fund disbursement in order to ensure value for fund already released. However, it is the proper management of the process of fund release and retention of some funds that determines the value for money expected on the projects. It is against this background that this study was centered on managing project retention fee in residential building projects in Lagos state, Ogun state, Abuja (F.C.T.) and Port Harcourt in Nigeria. A random sampling technique was used in the study, a population size of 250 residential building projects was used for the study from which sample size of 120 was chosen. Moreover, a structured questionnaire in Likert scale 1-5 was used for the work. Mean Item Score was used to generate the agreement index for the parameters influencing the retention fee management process. It was discovered that most deducted retention percentage is 5% of the project cost. Also, the type of intervention system often used as alternative intervention system was studied, the most advocated intervention system is paying interest on retention when delayed, followed by release of retention on line item basis. There should be adequate compensation for the fund tied down. However the following intervention system could be used: release of retention fee on line item basis, introduction of letter of credit, application of bond as alternative of retention fee, application of performance bond, financial security package, the use of escrow account for retention fee, use of payment bond and performance bond among others. The combination of two or three or all of them should guarantee adequate management of the fund. However, there are challenges often encountered in the fund administration these includes; delay in the release of fund, reduction in contractors fee and retention fee reduces contractors profit if all the retained fund is used to remedy bad work among others. Factor Analysis in Regression Analysis of SPSS software was used to generate factors for a suitable fee management model by reducing the factors to their Coefficients and Eigen Values. The model would assist clients and project actors in management of project elements retention fee on residential building sites.


Chapter One


Introduction

1.1 Background to the Study

The practice of retainage has its origin in the United Kingdom industry at the outset of railway system construction in 1840’s. There was massive construction then, and it created environment that encourage all entrants to practice construction in order to meet the surging demand. The inability of many of the companies to perform lead to insolvency, this situation then influenced the rail road companies to develop system of keeping back 20% of the contractors payments to guarantee performance and offset completion cost on should the company default (Specialist Engineering Construction Groups (SECG), 2002). Retention commonly referred to as retainage is a concept used to describe the amount of money often kept back on construction project. Holmes (2014) described it as the percentage amount of payment money held back from contractors’ project fee. The benchmarking, configuration and structuring of the fee is the responsibility of the contractor to the subcontractor, client to contractors or those paying for the work to be done. Also, Cherrine (2014) viewed retainage as amount of money earned but not paid out immediately. Construction project can be divided into elements with accompanied elemental cost implications, the retention fee therefore indemnify contractors against financial loss in situation of adverse financial condition.

Retention provides the project owner the opportunity to obtain value for his money with full understanding of the fact that the contractor or builder must complete the work if he is to be completely paid for his or her work. Retention plan often calls for the withholding of 5 percent to 10 percent of payment until the work is finished as promised. Also, according to Holmes (2015) and Joint Contracts Tribunal (1998), retention is also centers on items on punch list; this refers to items that will vary after completion of a project, retention would ensure completion of the items in its entirety; for instance, if an owner award a contract of constructing a four bedroom flat at ₦20,000,000, or ₦ 4,000,000 for maintenance service. The builder would not receive 20 percent of what was completed until the completion of the whole project elements. The 20 percent of the fund would be released after project completion.


1.2 Statement of the Problem

A retention bond is a formal agreement between the sub-contractor and a third party. The bond involves surety that acts as guarantor between contractor and sub-contractor. In an ideal situation, retention bond only takes effect if the sub-contractor fails to effect the practical completion or remedy a defect. Hawkswel (2014); Hughes; Gray and Murdoch (1997) and MacCartney (1992) were of the opinion that retention bond allows contractor the opportunity to rectify any identified defects within an agreed period., hence, it is a good thing to include retention clause in the administration of a project.

However, retention fee is not applicable in all situations; one of such situations is the store materials handling. Construction retention plan must not be enforced on construction workers that handle store materials, Also, materials suppliers should not be enforced to follow retention plan since they must complete their work before the commencement of works, the reason for it is that they must be paid up front with no retention plan in place. Finally, retention plan is limited in correcting situation of dishonesty and disingenuous about contractors’ work.


1.3 Objective of the Study

The main objective of this study is to examine the managing retention in residential building projects in Nigeria.

Specifically, the study aims:

  1. To determine the scope Of Retention Fee Application On Project Elements
  2. To evaluate the Intervention Systems In Retention Fee Administration
  3. To determine the Challenges Of Retainage Practice
  4. To determine the impact Of Retention Fee On Project
  5. To determine the model For Managing Retainage Fee On Building Construction
  6. To evaluate the Factor Rotation Of Parameters For Retention Fee Management Model

1.4 Research Questions

  1. What is the scope Of Retention Fee Application On Project Elements?
  2. What is the Intervention Systems In Retention Fee Administration?
  3. What are the Challenges Of Retainage Practice?
  4. What is the impact Of Retention Fee On Project?
  5. What is the model For Managing Retainage Fee On Building Construction?
  6. What is the Factor Rotation Of Parameters For Retention Fee Management Model?

1.5 significance of the Study

Much research and many enquiries have been made in relation to the retention practice world over, more so in the US, UK and Australian construction industries in the past two decades or so. The UK parliament had appointed ‗The Trade and Industry Committee‘ back in 2002 to conduct an enquiry regarding the retention practice. The report named ‗The use of retentions in the UK construction industry‘ was published by the House of Commons in November 2002. The report recognised the fact that the retention practice is out-dated in the modern day construction industry and placed heavy burden on many companies especially the SME‘s.

In Australia a recent inquiry was commissioned and published in November 2012 by the NSW government on the topic of ‗Construction Industry Insolvency in NSW‘. An in- depth inquiry was made with regards to the retention monies. It was found that different forms of bank guarantees were used widely on large commercial projects; however cash retention was still the most common form of security used in subcontract agreement. Performance bonds were rarely used even though it was an alternative. A lot of issues were identified with regards to the retention practice from the subcontractor‘s perspective, which will be discussed later. The existence of retentions was not questioned however the inquiry clearly stated that the retention system was abused and placed a considerable strain on the supply chain predominantly the subcontractors. It was also found that when used appropriately retentions do play an important role in providing security for performance in contract works. With regards to the abuse of the practice there was unanimous support for the protection of retention funds by placing them in trust accounts (Collins, 2012).


1.6 Scope/Limitation of the Study

The scope chosen for the study are Abuja, Lagos state and Port Harcourt in Nigeria. The location was chosen in view of the fact that they are noted for agglomeration of different cadres of construction companies.

The researcher encountered some constraints, which limited the scope of the study. These constraints include but are not limited to the following.

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.


Chapter Five


Conclusion and Recommendations

The aim of the research work has been achieved, the study has presented issues that border on the management and administration of retention fee on selected construction projects. In Table 7.1. it was discovered that most deducted retention percentage is 5% of the project cost. Also, the type of intervention system often used as alternative intervention system was studied. Payment of interest on the retention fund on occasion of delayed payment was advocated, this is to be remedied with interest on the delayed fund. There should be adequate compensation for the fund tied down. However the following intervention system could be used: release of retention fee on line item basis, introduction of letter of credit, application of bond as alternative of retention fee, application of performance bond, financial security package, the use of escrow account for retention fee, use of payment bod and performance bond among others.

The above toed the line of submission of Cherine (2014), Hawskwel (2014), Holmes (2014) and Ahmad and Barnes (1994). The combination of two or three or all of them should guarantee adequate management of the fund. However, there are challenges often encountered in the fund administration these includes; delay in the release of fund, reduction in contractors fee and retention fee reduces contractors profit if all the retained fund is used to remedy bad work among others, this as well is in agreement with Ahmad and Barnes (1994). Also, Hawkswel (2014); Hughes; Gray and Murdoch (1997) and MacCartney (1992) were of the opinion that retention bond allows contractor the opportunity to rectify any identified defects within an agreed period., hence, it is a good thing to include retention clause in the administration of a project which this study advocated.

Moreover, a model was presented that could help in the retention fee management on project works. The model toed the line of submissions of developing hedonic models in Picard, Antoniou and Adré de Palma (2010), Amusan; Joshua; Adegbenjo and Owolabi (2012), Rustom and Amer (2006), Bowel, Cattel and Kaka (2008).

However, according to the outcome of the analysis, combination of some factors contained in the model would induce highest positive effect, that is, F3, F6, F14, F15 and F16. These factors include; (non-holding back of retention fee; introduction of retention fee to improve relationship and all contractors’ retention money should not be used for repair work’). Also, financial security in exchange of retain-age fee; and application of performance bond as alternative to retainage fee. The combination of some or all of the factors guaranteed result oriented retention management system on residential and public construction projects.


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