Many construction and engineering companies, both Main Contractors and Subcontractors, are experiencing cash flow difficulties at this present time. The reasons for this situation are myriad and its not the purpose of this blog post to go into them. Suffice it to say that late payments to the downstream supply chain are unfortunately not a rare occurrance. Indeed, they are an all-too-familiar and unfortunate aspect of the industry in recent years.
So how can this situation be alleviated, and alleviated quickly?
KHIEBRA believes that retention clauses, as applied generally throughout the Middle East, are grossly unfair and are not required from any reasonable or contractual perspective. Their disappearance would, in one fell swoop, greatly assist contractors, subcontractors and the entire downstream supply chain by releasing badly required funds immediately into the marketplace​, without the need for any additional budget allocations and would greatly assist the cash flow and progress of future projects.
Furthermore, KHIEBRA believes that project Employers would not be at any greater risk or disadvantage as a result of agreeing, or being forced to agree, that Retention Clauses will not be part of the future contractual landscape of Qatar. Indeed, although not obvious at first glance perhaps, KHIEBRA believes that Employers and their projects would only have benefits from the abolition of such clauses, with zero downside. Cash flow would obviously be much better, assisting downstream payments, and progress and completion dates would logically see a marked improvement.
So why are Retention Clauses unfair & unnecessary?
Take your typical project in Qatar, and some typical contractual clauses related to payment (which are IN ADDITION to 10% retention) :
10% Performance Bond (on demand with no right of objection).
Inspection Request Approvals and Sign-Offs before any mid-project progress payment is released.
5% Payment held until 'Completion/Handover Documentation' is finalised and submitted and approved.
5% (or maybe 10%!) held until final approved Testing & Commissioning approval.
Given all the above, it's not uncommon to have a scenario where the Employer takes full beneficial use of the project, starts to operate it for the purpose it was built, and at the same time:
The full 10% retention is still in place because the project consultant insists not to release the first 50% of retention until various snags, minor defects and NCRs are closed out, disregarding client taking-over.
The 5% amount related to project close-out documentation is still not released because the project consultant insists on the dotting of every 'i' and the crossing of every 't' related to the documentation.
The 5% (or 10%) amount related to final Testing & Commissioning is still not released because there is as yet no final T&C sign-off by the project consultant, again disregarding the client taking-over. This can often take the full DLP period, or even longer on many projects.
Some contract works, let's say 5%, are still awaiting close out of NCRs, Inspection Request and related approvals, and remain unpaid at taking-over.
So, on the date the Employer has taken over the project - with full beneficial use, and has started to earn an income from it (or use the project for its intended purpose), there can be from 20% to 30% of the project value still unpaid to the Main Contractor (& Subcontractors), in addition to the Employer having the added protection of an 'on demand' Performance Bond. In the opinion of KHIEBRA, this is not reasonable.
If Main Contractors were making similar (high) profit margins then one could reasonably argue that the entire supply chain was only awaiting their profit return on the project at this stage. But the industry reality is that Main Contractors consider a 10% margin akin to a miracle, with 3% to 5% being a far more realistic expectation or norm. And any loss-making project (yes, there are many!) eats the returns from the profitable projects.
The collapse of Carillion has brought retention clauses into sharp focus in the UK. Hundreds of millions of pounds of retention amounts were held against Subcontractor accounts and suddenly those same subcontractors found themselves as unsecured creditors with no right to their retention amounts upon the Carillion liquidation. It is hoped that the Construction (Retentions Abolition) Bill (which has had a first reading) will become law in 2025 if it can get sufficient parliamentary support.
Summary
Given the financial protections that the Employer enjoys throughout the project duration and even upon Employer taking over the project, particularly the existence of the Performance Bond until the end of the defects liability period (DLP), KHIEBRA believes that retention clauses that allow the Employer to retain up to 10% of the project value during the execution phase (and 5% during DLP) are contractual overkill and are, in reality and effect, a duplication of the Performance Bond.
The intention of 'retention' is to ensure 'final performance' and the intention of the 'Performance Bond' is to ensure 'final performance', so in effect both are serving the same purpose. KHIEBRA was informed by one client in recent days that "there are subtle differences between the 10% retention and 10% Performance Bond", but was unable to explain the subtleties!
In the opinion of KHIEBRA, Retention Clauses are unfair, unreasonable, and unnecessary, and are one of the primary reasons that the construction industry in Qatar is suffering at present in terms of paying bills on time and cash flow more generally.
So, let's kick out Retention Clauses, making Construction Contracts in Qatar a model for the entire region.
KHIEBRA truly believes that Qatar deserves the best!
www.khiebra.com