Monetary retentions for subcontract work: a risk-based approach

Abstract

The subcontracting culture in New Zealand is such that the same retention regime imposed on contractors is imposed on subcontractors by and large. This paradoxically fair contractual practice of back-to-back terms results in high retention rates (10%) and long defects liability periods set from contractor’s practical completion which has caused concerns for subcontractors with no rational basis for resolving such concerns. This study investigates this phenomenon from a risk based perspective to understand the link between risk and retentions particularly in relation to current practice. Accordingly, it is found that current retention rates do not show an association with overall risk computed as a product of likelihood and consequence based on contractors’ perceptions. However, when risk is viewed through these two components, it is seen that trades with high default risks for either likelihood or consequence results in high retention rates. Additionally, it is also seen that high risk is associated with subcontractor-harsh retention regimes with some exceptions lowering the strength of this association suggesting the need to investigate such trades to understand whether there are other overwhelming reasons for such exceptions. Thus, it is concluded that risk and retention regimes are linked to this extent although for a given level of risk, subcontractor friendly or unfriendly regimes could be achieved by a mix of different retention rates and release mechanisms. In this regard, it is seen that contractors seem to prefer high retention rates than longer defects liability periods for trades which have high risk levels. A further understanding about this relationship could be developed by undertaking a study on perceived overall risk levels and perceived retention regimes.