Retentions, or how to get a free overdraft at your suppliers’ expense

Retentions are fairly common in building and construction, and represent a proportion of the total contract price which is retained for a period of time, typically 12 months, by the customer. The idea is that in the event of a snag occurring within this period, the contractor will fix it, otherwise he doesn’t get his retention. A South Wales SME sent us their recent experiences…

The SMEs has been chasing two retentions relating to work done it did in 2002 as sub-contractor to a listed plc. The plc was doing work for a university, and had sub-contracted some of it to the local SME. The SME is only owed, in total, £150 in respect of these two jobs, which was supposed to have been retained by the plc for a period of 12 months after completion.

The plc did not pay over the retention in 2003 and when chased early in 2004, said that it wouldn’t be paying until it had itself been paid by its client. This policy, known as “pay when paid”, is illegal, but the plc was banking on the SME not going to court for such a small amount of money. In 2006 the SME wrote again, and this time received no response.

In the last few weeks the new CEO wrote again to the plc, and received a phone call back. The commercial manager in the plc’s local office agreed that the retentions were due. He blamed the SME’s lax accounting for their non-payment, and said that he expected every supplier to write quarterly to chase retentions – their own money! He then suggested a “deal”, have one retention (£65) paid and write off the other (£85). The SME refused, and so was told that neither would be paid.

The commercial manager went on to make a number of accusations and excuses - perhaps the SME was on the verge of bankruptcy if it was bothered about £150; hadn’t the CEO got something better to do with his time; the member of plc staff who had previously dealt with this had been made redundant, so there was nothing he could do; it would be a shame if the two companies were to fall out over such a small amount and not have the opportunity to work together again…hmmm…. blackmail and threats, anyone?

Yes it’s only £150, but how many £150’s are there owed? The commercial manager proudly said that the total value of retentions held by his office alone was £1.3m – if just 5% of these are held unfairly then the office is using £65,000 of its customers’ money as a free overdraft. Multiply that by 15 offices around the UK, and it’s around £1m of free money in the plc’s bank account. Oh yes, and if we don’t get our money in 7 days we’re going to court.

How the stockmarket works

Once upon a time in a village in India, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10 and, as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy monkeys at $20 each. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so scarce it was an effort to even find a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50 each! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. 'Look at all these monkeys in the big cage that the man has already collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each.' The villagers rounded up with all their savings and bought all the monkeys.

Then they never saw the man nor his assistant again, only lots and lots of monkeys! Now you have a better understanding of how the stock market works.'

Collective Thought is grateful to the person who wrote this joke and emailed it around. Thanks!