Retention and contractor progress payments

Framework and principles

Who uses which part

Definitions

Seven principles

Roles and responsibilities (RACI)

R = Responsible, A = Approver, C = Consulted, I = Informed. Legal counsel should also review any dispute or contract termination.

Relevant laws and standards

Standard contract terms to specify

Contractual DLP vs statutory liability

Clauses that exclude or limit liability may be ineffective in some cases. Have legal counsel review them.

Deducting retention from each progress payment

1. The subcontractor submits the progress invoice and progress report to the contracts team.
2. The project team or QS measures the work and issues the payment certificate.
3. Accounts calculates retention at the agreed rate and checks that it does not exceed the cap.
4. Calculate VAT and WHT on the amount actually paid.
5. The approver approves payment in line with the certificate.
6. Finance transfers the net amount to an account in the contractor's name.
7. Accounts records the retention payable, updates the register and issues the 50 bis certificate.

Retention this period = MIN(work value this period × deduction rate, cap − cumulative retention before this period)

Payment before VAT = work value this period − retention this period − other deductions under the contract

Net payment = payment + 7% VAT − 3% WHT

Tax: timing of WHT and VAT

Releasing retention

First release at handover

1. The subcontractor notifies completion and requests an inspection.
2. The project team or QS inspects and prepares a punch list.
3. The approver issues the handover certificate.
4. The subcontractor submits a request for release of 50% with the full set of documents.
5. The contracts team checks evidence of wage payments and the subcontractor's employees' social security
6. Accounting calculates VAT and WHT on the amount released
7. Approve and transfer the refund
8. Clear the retention payable, update the register and start the DLP count

Release of the final instalment at the end of the DLP

1. 30 days ahead: schedule a joint defect inspection
2. Joint defect inspection: all parties sign the inspection results
3. Defects found: notify the subcontractor in writing, with a deadline for rectification
4. Subcontractor does not rectify by the deadline: hire others to fix the defects and keep back-charge evidence
5. Subcontractor submits a claim for the remaining 50% with the Final Account
6. Check evidence of wage payments and the subcontractor's employees' social security
7. Deduct the back-charge and calculate VAT and WHT on the amount released
8. Approve, transfer the money, close the register and issue the 50 Tawi certificate

Steps 3–4 apply only if defects are found. If none are found, go straight to step 5.

Documents supporting the release

Bank guarantee (BG) in place of cash

1. Subcontractor requests to use a BG in place of cash
2. Contracts and legal teams check the bank, amount, conditions and validity period
3. Accept the BG and then either stop deducting or return the cash already withheld
4. Monitor the expiry date in the register and give advance notice for renewal
5. End of DLP with no claims: return the BG

• Issued by an accepted commercial bank, on the employer's form
• Unconditional, payable on written demand
• Value not less than the retention; validity to the end of the DLP plus 30–60 days
• Verify with the issuing bank, keep the original and set a reminder 60 days before expiry
• If expiry is near and defects are not yet fully rectified, extend the validity or call the BG before expiry as the contract allows

Main contractor: back-to-back with subcontractors

A main contractor has retention deducted by the project owner and also deducts retention from its subcontractors, so the terms on both sides must be aligned.

• Set the subcontractor's DLP to end no earlier than the DLP with the project owner, or plan liquidity to cover the gap.
• Pay-when-paid clauses must be written clearly and fairly, and reviewed by legal counsel.
• Push the subcontractor to rectify defects before the project owner's end-of-DLP inspection, because a subcontractor's defects are the main contractor's liability to the project owner.
• Track retention receivables and payables together in the register.

Accounting entries

Employer side

An employer that cannot claim a VAT credit records the VAT as project cost, for example by debiting project cost THB 2,666,250 on the progress payment.

Contractor side

Under TFRS 15 paragraphs 105–108, retention for which the right to payment still depends on conditions other than the passage of time is presented as a contract asset; once only the passage of time remains, it becomes a receivable. Output VAT on retention arises when payment is received, so it is not recorded at the time of deduction, provided the tax invoice is issued only for the amount received. ECL and back-charges expected to be deducted should also be reviewed.

Presentation

• Separate the portion to be released or received within 12 months as current and the remainder as non-current, in accordance with TAS 1.
• Measure at amortised cost under TFRS 9. Present value discounting is usually immaterial when the collection period is no more than 2 years.
• BGs received are not recorded as assets; control them in the register and disclose them as appropriate.
• Entities applying TFRS for NPAEs present retention receivables or payables, split between current and non-current, and should confirm the policy with the auditor.

Special cases

Subcontractor abandons the work or becomes insolvent

1. Record the facts and issue written warnings as the contract requires
2. Terminate the contract following the procedure in the contract
3. Measure the work done and assess the damages or the cost of hiring others
4. Set off against the retention and call the BG
5. Claim any shortfall or file a claim for debt repayment

• Check the subcontractor's employees' unpaid wages, because the main contractor is jointly liable
• Where the subcontractor is placed under receivership, set-off must comply with bankruptcy law; consult legal counsel.
• The BG must be called before it expires

Delay penalties and set-off

Penalties can be deducted from progress payments or retention as the contract allows. A penalty that is excessive can be reduced by the court. Set-off counts as a payment, so WHT must be withheld and a tax invoice obtained for the full amount before set-off, and written notice must be given every time, stating the amount, reason and evidence.

Additions and omissions

Adjust the cap to the changed contract value, and deduct retention from additional work at the same rate if the contract so provides. For omitted work, if cumulative retention exceeds the new cap, release the excess in the next payment.

Disputes

Releasing retention late without a reason under the contract risks default interest and damages the relationship with the contractor. Keep evidence at every step: defect notices, photographs, inspection reports, quotations from the party who rectified the work, and the contractor's acknowledgements.

Controls and verification

Retention Register

Month-end closing and reconciliation

1. Close the month's instalment and release entries in the register
2. Reconcile the register balance with the retention payable or receivable in the GL
3. Check the WHT on each release is included in the PND return and that 50 Tawi certificates have all been issued
4. Report items due for release and BGs expiring within the next 90 days
5. Sign off the reconciliation

Common differences are: a back-charge set off but the register not adjusted; a release paid but the payable not cleared; and the current classification not updated to the actual dates.

Red Flags

Tax penalties

Retention release request form

Draft retention clause

1. The employer will deduct retention at [5]% of the certified value of work in each payment until cumulative retention equals [5]% of the contract value, including additions and omissions. Retention bears no interest.
2. The employer will release [50]% of the retention within [30] days of the handover date, and the remainder within [30] days of the end of the [12]-month defects liability period, once the contractor has fully rectified the defects.
3. The contractor may, instead of a cash deduction, provide a bank guarantee acceptable to the employer, in the employer's form, unconditional and payable on demand, valid until the end of the warranty period plus [60] days.
4. If the contractor fails to rectify the work within the time stated in the employer's written notice, the employer may have a third party carry out the rectification and may deduct the actual costs, penalties or damages from the retention or from any other sums payable to the contractor, or enforce them against the bank guarantee.
5. The contractor will issue tax invoices for the amount actually received in each progress payment and when the retention is refunded.
6. Before each release of retention, the contractor must provide evidence of payment of wages and social security contributions for employees working on the project, and a letter confirming that there are no outstanding claims.

Figures in [ ] are to be adjusted as agreed and reviewed by legal counsel before use.

Checklist for deductions and releases

Points to confirm before use