3-minutes read to understand what is retention sum in construction contract

Q1.What is “retention sum” in construction contracts?

Answer: 

Retention sum in a construction contracts is to empower the employer to retain a stipulated percentage of each payment which becomes progressively due to the contractor.

Q2. How much is the retention sum for construction contracts?

Answer: 

Normally in Malaysia, it is common and standard practice for the employer to retain 10% of the certified sum of contract in the interim progress certificate as the retention sum. However, we shall refer to each of the construction contract that would stipulates the amount of retention sum for that specific construction contract.

Q3. Is there a limit on the amount of retention sum?

Answer: 

In most of the general condition of construction contract in Malaysia, the limitation for the retention sum would be 5% of the contract sum. Nonetheless, we shall refer to the terms and conditions of each of the construction contract as it depends on the terms stated in the construction contract, and terms might differ in different contract.

Q4. Why retention sum is imposed on the contractors in a construction contract?

Answer: 

The purpose of retention sum is to protect the Employer in the event when the contractors fails or defaults in its performance under the contract, such as abandonment or the works is of poor or defective quality.

Q5. When will the retention sums release to the contractors?

Answer: 

In most of the construction contract, the retention sum is apportioned into two moieties, the first moiety will be released upon Certificate of Practical Completion (“CPC”) of the Construction Project and the second moiety being released upon the issuance of Certificate of Making Good Defects (“CMGD”).

Q6. How can I get back my retention sum if the employer or main contractor refuses to release the retention sum?

Answer: 

There are 3 types of legal course of action to claim back the retention sum that are due and payable to the contractors, namely statutory adjudication claim that governed under the Construction Industry Payment and Adjudication Act (“CIPAA”) 2012 that came into operation on 15 April 2014, court proceedings or arbitration (if there is Arbitration clause in the construction contract) against the main contractor or employer.

Q7. Is there any time limit for the contractors to bring an action against the employer for the release of retention sums?

Answer: 

According to Section 6(1)(a) of the Limitation Act 1953, it provided that any action must be brought within six years from when a cause of action accrued and Section 7(3) of the CIPAA 2012 stated that a dispute referred to adjudication under CIPAA 2012 is subject to the Limitation Act 1953. Therefore, the limitation period to bring an action to claim for the retention sums is 6 years from when a cause of action accrued.

Q8. There is no CPC or CMGD issued, can we still claim for the release of retention sums?

Answer: 

Yes, we can still claim for the release of retention sum without the issuance of CPC or CMGD under statutory adjudication, where Section 25(n) of Construction Industry Payment and Adjudication Act 2012 connotes that the Adjudicator shall have the power to decide or declare any matter notwithstanding no certificate has been issued in respect of the matter.

Q9. Is it possible for liquidated ascertained damages (“LAD”) to set off the retention sum that is due and payable to the contractor?

Answer: 

Whether is it possible for LAD to set off the retention sum that is due and payable to the contractor is depends on the terms and conditions of the construction contract. If there are clauses in the contract allowing the set off the employer/ contractor shall ensure that the conditions precedent satisfied before they entitled to set-off any claims for LAD against the release of the retention sum.

Q10. What shall the contractors do if the employer has been wound up before the due date for the release of retention sums?

Answer: 

The contractor can file a Proof of Debt (“POD”) against the employer/main contractor, then the appointed liquidator will determine whether to approve the debt as the retention sums owed by the employer to the contractors are debts due and payable to the contractor as an unsecured creditor.

THIS FAQS ARE PREPARED AND PUBLISHED BY MESSRS GAN & ZUL, ADVOCATES & SOLICITORS, KUALA LUMPUR.-CONSTRUCTION & ALTERNATIVE DISPUTE RESOLUTION DIVISION-