An Examination of the Retention Practice in the New Zealand Construction Industry

Abstract

The payment mechanism of construction projects is different compared to other industries. For every payment made to a contractor or subcontractor a sum of money is held back which can vary from a low of 2% to as high as 10%. This deduction is a phenomenon peculiar to construction and is known as retention, practiced in the construction industry for well over a century. Retentions are held by both clients and contractors and as such involve the whole supply chain. However the effect the practice has on each party varies significantly as a result of which there have been serious debates regarding its continuation world over. Much research and a number of enquiries have been carried out in other countries such as the US, UK and Australia. There is anecdotal evidence suggesting issues around retentions in New Zealand however there is a lack of empirical research on this subject area. This raises the need for undertaking this research to find out the present status of retentions in the New Zealand construction industry. It is in this context, that this research aims to examine the practice of retentions in the New Zealand construction industry with the main focus on identifying the issues surrounding the practice and exploring feasible alternatives to replace retentions. The study also focuses on finding the purpose of retentions and weighing its detriments and benefits in order to determine the value in the continuation of a practice which dates back to the early 19th century when construction markets were so very different.

The current research has adopted a mixed methods approach comprising of three stages of data gathering; preliminary data collection by interviewing experts and gaining rich experiential data from them followed by an industry wide questionnaire survey. The data collected by the two approaches was then validated using a qualitative survey once again utilizing experts from the construction industry in New Zealand. The techniques used for data analysis were descriptive and inferential statistics and thematic analysis.

The findings of the research study revealed that retentions fulfill a number of purposes in construction contracts, the primary one being performance security. It was further determined that performance security includes a range of purposes from insolvency to defect rectification. The research found that problems with regards to the practice are prevalent in the New Zealand construction industry and it was identified to be extremely serious especially from the sub-contractors perspective. Further the research found a number of issues attached to the practice of retentions; the main issue being the security of retention monies. The study weighed the costs and benefits of the practice and it was found that the benefits of the practice are greater for one party i.e. the clients and the costs are greater for the other two i.e. the contractors and subcontractors. The study found that even though there are issues with the use of trust accounts however in order to secure retentions it was a feasible alternative. Finally the study identified a range of issues with the current retention regime used in New Zealand and proposed a few guidelines or factors such as performance security characteristics of client, retention withhold/release mechanism, contractor?s performance history, financial stability of main contractor that could impact upon setting up of retention regimes. Based on the findings of the study the overall recommendation among others is that the current practice of retention in New Zealand needs to be reviewed. There is a need to implement changes for the practice to be fair for all the parties involved and to improve the productivity of the construction industry.