QSM659 :

PROFESSIONAL PRACTICE III

RETENTION FUND
 SYAMSUL IKMAL BIN ABD. NASIR
 MOHD HELMI B MOHD NASIR
 NIK KHAIRUL AZIM BIN MUSTAFA KAMAL
RETENTION
FUND
 1.0 INTRODUCTION

 Another mechanism to protect the employer in the case of defective works

and non-performance by the contractor.

 Employer can recover the loss through deduction from the amount payable
to the contractor in the interim and final certificates.

 The contractor is responsible to carry out the works according to the

contract and to complete the works within stipulated time.

 If the obligation is not fulfilled, it will be breach of contract and the

contractor has to pay employer for the loss incurred by the employer due to
the breach.
 2.0 P.A.M. CONTRACT 2006

 Clause 16.1 - Possession of occupied part with consent

 If at any time before Practical Completion of the Works, the Employer wishes
to take possession and occupy any parts of the works and the consent of the
Contractor has been obtained, then notwithstanding anything expressed or
implied elsewhere in the Contract.

 Clause 30.5 - Retention fund

 The Employer may retain the percentage of the total value of the work,
materials and goods referred to in Clause 30.2, which is stated as Percentage
of Certified Value Retained. When the sum of the amounts so retained equals
the amount stated in the Appendix as Limit of Retention Fund or that amount
as reduced under clauses 16.1(d) and 16.1(f) and/or Clause 27.7, as the case
may be, then no further amounts shall be retained by virtue of this clause.
2.0 P.A.M. CONTRACT 2006 (cont’d)

 Clause 30.6 Rules regarding retention fund

Clause 30.6(a)
 The Employer's interest in any amount so retained shall be
fiduciary as trustee for the Contractor, Nominated Sub-
Contractors and Nominated Suppliers in writing from the
Employer (with a copy to the Architect) for such Retention Fund
to be paid into a trust account, such fund shall be paid by the
Employer within fourteen (14) Days.
 2.0 P.A.M. CONTRACT 2006 (cont’d)

Clause 30.6(b)
 When the Employer exercises any right under the Contract to deduct
from any monies due to or become due to the Contractor or where
applicable, the Nominated Sub-Contractors or Nominated Suppliers, he
shall inform the relevant party in writing of the reason for that
deduction.

Clause 30.6(c)
 Upon the issuance of the Certificate of Practical Completion, the
Architect shall within fourteen (14) Days issue a Certificate for the
release of one half of the Retention Fund and the Contractor shall be
entitled to payment thereafter within the Period of Honoring
Certificates.
 3.0 RETENTION MONEY

 There is a limit to the level of the retention fund. Usually 5% of the sum of each
interim payment.

 Once the project is complete, the consultant will issue a ‘Certificate of Practical
Completion’.

 This is the ‘maintenance period’ or ‘defects liability period’. At the end of the
period the consultant will make a list of defects still outstanding.

 When all ‘defects’ are complete and have been validated by the consultant, the
retention money will be released.

 In Re Tout v Finch Ltd. (1954), the interest earned from the investment using
money held accrue to the employer and not the contractor against whom the funds
have been retained.
 3.0 RETENTION MONEY (Cont’d)

The contractor has the right to ask the employer to keep the money in the trust account to
be held by a stakeholder appointed by the contractor.

In the clause 30.6(a), ‘the Employer's interest in any amount so retained shall be fiduciary
as trustee for the Contractor…for such Retention Fund to be paid into a trust account,
such fund shall be paid by the Employer within fourteen (14) Days into an escrow
account…’

Release of retention money

Contractor demand for trust account Employer open trust account

< 14 days
 4.0 USE OF RETENTION FUND

 The money retained by the employer can be used at any time when ever there is non-
performance of the contract by the contractor.

 The government has the right to set-off an amount to cover its lost and expense arising
from contractor’s non performance.

 Performance bond may be used in the following circumstances:

The recovery of loss in determination by employer.

The recovery of liquidated damages.
Payment of defects made good by others if S.O elected to do so.
Payment of works executed by others if failure by the contractor to perform work
when instructed.
Payment for removal of improper work, materials or plant.
 4.0 USE OF RETENTION FUND (Cont’d)

 In the clause 30.6(b), ‘when the Employer...deduct from any

monies due to or become due to the Contractor…he shall inform
the relevant party in writing of the reason for that deduction.’

 This clause explains that the contractor, sub-contractor or the

nominated supplier has to be made known the reason whenever
the retention fund is used.

 The affected party can contest the employer’s decision and bring
the matter to arbitration.
 5.0 AMOUNT OF RETENTION

 Clause 30.5
• ‘The Employer may retain the percentage of the total value of
the work, materials and goods referred to in Clause 30.2, which
is stated in the Appendix as Percentage of Certified Value
Retained. When the sum of the amounts so retained equals the
amount stated in the Appendix as Limit of Retention Fund or
that amount as reduced under Clauses 16.1(d) and 16.1(f) and/or
Clause 27.7, as the case may be, then no further amounts shall
be retained by the virtue of this clause.’

• The gross value of work done and materials as ascertained in the

certificate is subject to deduction for retention money.
 5.0 AMOUNT OF RETENTION (Cont’d)

• Percentage of retention should be inserted by the employer in the

Appendix. If none is stated, not exceeding 10% of accumulated
value of work done including materials on site.

• The deduction for retention money in the interim certificate must

stop when the accumulated amount so retained reaches the Limit
of retention money as stated in the Appendix. If none is stated,
not exceeding 5% of contract sum.
• Deduction for retention fund
 
Example 1:
 
Assumptions: 
Contract sum  : RM 20,000,000.00
Value of Preliminaries certified  : RM 400,000.00
Value of work executed to date  : RM 10,000,000.00
Value of material on site   : RM 200,000.00
Percentage of retention stated in the Appendix to tender : 10%
Limit of retention money stated in the Appendix to tender : 5% of contract sum
 
Gross value of work executed  = RM 400,000.00 + RM 10,000,000.00 + RM 200,000.00
= RM 10,600,000.00
 
Deduction for retention money = RM 10,600,000.00 x 10%
= RM 1,060,000.00

Limit or retention money = RM 20,000,000.00 x 5 %
= RM 1,000,000.00
 
 
The amount to be retained in this payment is RM 1,000,000.00 since the amount that can be retained 
must not be greater than the amount stated as the Limit of retention money in the Appendix to tender.
Example 2
 
Assumptions: 
Contract sum  : RM 6,400,000.00
Value of Preliminaries certified : RM 350,000.00
Value of work executed to date  : RM 2,500,000.00
Value of material on site   : RM 250,000.00
Percentage of retention stated in the Appendix to tender : 10%
Limit of retention money stated in the Appendix to tender : 5% of contract sum
 
Gross value of work executed  = RM 350,000.00 + RM 2,500,000.00 + RM 250,000.00
= RM 3,100,000.00
 
Deduction for retention money = RM 3,100,000.00 x 10%
= RM 310,000.00 

Limit or retention money = RM 6,400,000.00 x 5 %
= RM 320,000.00

 The amount to be retained in this payment is RM 310,000.00
 6.0 PAYMENT OF RETENTION FUND

Clause 30.6 (c)

‘ upon the issuance of the Certificate of Practical Completion, the Architect shall within fourteen
(14) Days issue a certificate for the release of one half of the Retention Fund and the Contractor
shall be entitled to payment thereafter within the Period of Honouring Certificates; and

Clause 30.6(d)
‘ upon the issuance of the Certificate of Making Good Defects, the Architect shall within
fourteen (14) Days issue a certificate for the residue of the amount then so retained and the
Contractor shall be entitled to payment within the Period of Honouring Certificates.’

The retention money is released in 2 stages:

• Half of the amount so retained upon the issue of the Certificate of Practical Completion for the
whole of the work, and

• The other half upon the issuance of Certificate of Completion of Making Good Defects for the
work.
 

½ amount End of D.L.P ½ amount

C.P.C. C.C.M.G.D

12 months               ≤ 14days   ≤ 28days

     Figure 1: Release of retention money

Example: Payment of Retention Fund
Assumptions:
Gross amount due to the contractor at completion = RM 10,000,000.00
Limit of retention money stated in the Appendix to tender = RM 500,000.00
Contract sum: RM 10,000,000.00.   No variation and other claim.

• Deduction of retention fund in last regular interim payment

Gross amount due to the contractor = RM 10,000,000.00
Less Previous Payments = RM   9,000,000.00
      RM   1,000,000.00
Deduct Retention money(Limit 5%) = RM      500,000.00
Net amount due to contractor = RM      500,000.00

i.e. the contractor is paid RM9.50m as RM500,000.00 is retained as retention sum.

• Release of retention fund upon issuance of C.P.C.

Gross amount due to the contractor = RM 10,000,000.00
Less Previous Payments = RM   9,500,000.00
        RM      500,000.00
Deduct Retention money(Released 2.5%) = RM      250,000.00
Net amount due to contractor = RM      250,000.00

i.e. the contractor is paid RM9.75 as half of the amount retained has been released.
• Release of retention fund upon issuance of
C.C.M.G.D

Gross amount due to the contractor = RM 10,000,000.00
Less Previous Payments = RM   9,750,000.00
       RM      250,000.00
Deduct Retention money (Released 5%) = RM                0.00
Net amount due to contractor = RM   250,000.00
 
i.e. the whole amount of RM10,000,000.00 has been paid to 
the contractor as no more money is retained as retention 
sum.
 7.0 RETENTION FUND IN PARTIAL
POSSESSION BY EMPLOYER

Clause 16.1 (d)

• ‘upon the issuance of the Certificate of Partial Completion, the
Architect shall within fourteen (14) Days issue a certificate to
release half the amount of the Retention Fund in the ratio of the
estimated value of the Occupied Part to the Contract Sum. The
Contractor shall be entitled to payment within the Period of
Honouring Certificates. The amount of the Limit of Retention
Fund shall then be reduced by the same amount.’

• The amount retained for the relevant part must be released when
the section is occupied by the employer
• The total amount retained for the relevant part is equal to 5% of
the value of that part i.e. the same percentage that is used to
determine the limit of retention fund for the whole work.

• The first half of the amount retained is released within 14days

after occupation of the relevant part.

• The limit of retention fund for the contract is reduced by the

amount of the retention fund released.
• Example: Deduction for first half of retention money
 
Assumptions :
Contract sum : RM 10,000,000.00
Value of Partial possession : RM 2,000,000.00
Limit of retention money stated in the Appendix to tender 5% of contract sum
 
Limit of retention money = 5% of RM 10,000,000.00
                                     = RM 500,000.00

Limit of retention money of the relevant part = 5% of RM 2,000,000.00
= RM100, 000.00

Limit of retention money for the contract = RM500,000.00

Deduct half of amount retained (2.5% value of relevant part) = RM  50,000.00
New Limit of retention money for the contract   = RM450, 000.00
Clause 16.1(f)
‘ upon the issuance of the Certificate of Making Good Defects of
the Occupied Part, the Architect shall within fourteen(14) Days
issue a certificate for the release of the remaining amount of the
Retention Fund in respect of the Occupied Part. The Contractor
shall be entitled to payment within the Period of Honouring
Certificate.’

• The second half of the amount retained is released on the issue of

Certificate of Making Good defects of the relevant part.

• The limit of retention fund for the contract is then reduced by the
total amount of the retention fund released.
• Example: Deduction for second half of retention money

Assumptions:
Limit of retention money = RM 450,000.00
 
Limit of retention money of the relevant  part 
       = 5% of RM2,000,000.00
       = RM 100,000.00

Limit of retention money for the contract = RM 450,000.00
Deduct remaining amount retained 
(2.5% value of relevant part) = RM   50,000.00
New Limit of retention money for the contra= RM 400,000.00
~THE END~