Rancho Mesa's Alyssa Burley and Account Executive of the Surety Department Andy Roberts discuss unlocking working capital, specifically how subcontractors can reduce or release retention faster.
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Director/Host: Alyssa Burley
Guest: Andy Roberts
Producer/Editor: Megan Lockhart
Music: "Home" by JHS Pedals, “News Room News” by Spence
© Copyright 2024. Rancho Mesa Insurance Services, Inc. All rights reserved.
Transcript
Alyssa Burley: Hi, this is Alyssa Burley with Rancho Mesa's Media Communications and Client Services Department. Thank you for listening to today's top Rancho Mesa News, brought to you by our Safety and Risk Management Network, StudioOne. Welcome back, everyone. My guest is Andy Roberts account executive in the Surety Group with Ranch Mesa. Today, we're going to talk about unlocking working capital. More specifically how subcontractors can reduce or release retention faster. Andy, welcome to the show.
Andy Roberts: Thank you, Alyssa. It's great to be back.
AB: So before we get into the discussion, will you explain how retention works?
AR: Absolutely. So retention is a very common practice within the construction industry that typically involves between five and 10% of each payment to the subcontractor being withheld until the project has been completed. You know, the purpose behind this is pretty simple. It's designed to make sure that subcontractors satisfy their contractual agreements before they receive their last payment for the work that they've done. You know, while this practice serves a real purpose, it can cause significant issues for subcontractors if their payments are delayed.
AB: Okay. So what kind of issues could this cause for a subcontractor?
AR: Well, you know, really, regardless of the reasons why a retention payment could be delayed, whether it be overall completion delays or if there are issues with the work performed, the delay in payment can cause significant cash flow issues for subcontractors that do a lot of bodywork. Cash flow issues will have a direct impact on their working capital, which can have a negative impact on their bonding program. But, you know, however, there are some strategies that subcontractors can employ to get their payments released sooner. Like negotiating the terms of retention release in the contract.
AB: Okay. So how would a subcontractor go about negotiating those terms?
AR: Well, you know, prior to signing the contract, it's important that a subcontractor review and attempt to negotiate any unfavorable retention release terms. One option is, you know, negotiating a 10% retention down to 5% in the contract. You know, but should that not be achievable, subcontractors can also offer to provide performance and payment bonds, which might convince the project owner and or the GC to lower the retention amount or release the retention sooner.
AB: Okay. How could providing a performance and payment bond convince a project owner or the GC to make those changes to the contract?
AR: So performance and payment bonds protect the project owner and the general contractor in case the subcontractor fails to fulfill their contractual obligations, which is the main reason the retention is being withheld. Therefore, the presence of bonds on the project may allow a subcontractor to negotiate terms that are more favorable to them, potentially lowering their percentage withheld from each payment or even getting released at earlier points within the project. And while retention remains a standard practice within the construction industry, it can cause significant issues for subcontractors should those payments be delayed. So negotiating these terms in all contracts is vital, while also using the ability to provide bonds on the projects as a solution to getting more favorable terms.
AB: All right. So if a contractor sees a retention in their contract, try negotiating with the project owner or general contractor and think about providing a bond that should help them get paid faster. Andy, if listeners need a performance and payment bond or has questions about their bond program, what's the best way to get in touch with you.
AR: So I can be reached at 619-937-0166 or at aroberts@ranchomesa.com
AB: Andy, thank you for joining me in StudioOne.
AR: Thank you for having me. It's always a pleasure.
AB: This is Alyssa Burley with Rancho Mesa. Thanks for tuning into our latest episode produced by StudioOne. For more information, visit us at ranchomesa.com and subscribe to our weekly newsletter.
