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What You Need to Know About Retention Payments in Construction – One of the significant challenges faced by builders, especially on larger projects, is effectively managing payment obligations and deadlines. The introduction of recent laws in Australia to protect subcontractor payments has added an additional layer of complexity to this issue.

The Murray Review conducted in 2017 highlighted that subcontractors and vendors often faced difficulties in receiving timely and full payments as per the agreed contract terms.

This recurring problem can have severe consequences, such as the inability to meet payroll obligations, pay suppliers, or even lead to insolvency.

As part of the recommendations outlined in the Murray report, it was proposed that retention payments for subcontractors and vendors involved in major projects should be held in a designated Trust Account.

By implementing the recommendation, the Trust Account system aims to address payment challenges by ensuring that funds reserved for subcontractors and vendors are securely held.

This helps safeguard their financial interests and provides a level of assurance that payments will be made according to the agreed terms.

The Trust Account system adds an additional layer of accountability and transparency to payment processes in the construction industry.

It helps protect subcontractors and vendors from potential payment disputes and delays, promoting more fair and efficient financial transactions within the sector.

To navigate the complexities of payment management and comply with the evolving regulations, builders need to stay informed about the specific requirements and procedures associated with Trust Accounts and ensure proper implementation.

This would involve establishing robust financial tracking systems, clear communication with subcontractors and vendors, and adherence to legal obligations to maintain the integrity of the payment process.

What are Retention Payments in Construction?

Retention payments, a portion of milestone payments owed to subcontractors or vendors, are withheld until full completion and defect resolution.

This practice reduces risks for project owners and head contractors, serving as a cash guarantee for supply chain obligations.

However, managing these payments can be complex and time-consuming, particularly for those using manual systems like paper or Excel spreadsheets.

Transitioning from Paper to Digital

Retention Payments Can Slow Down Projects

Retention payments in construction projects can introduce complexities that may slow down the progress of major projects. With a high volume of invoices to handle, it becomes necessary to manually sort through each invoice to identify which ones require retention payments and which ones do not.

For instance, the supplier of a site Portaloo may not need retention payment withholding, while the subcontractor responsible for laying the slab it sits on might.

Managing retention payments effectively is crucial because any blockages in the cash flow and project payment system can have severe consequences, potentially leading to project delays or even project halts.

Cash flow is of utmost importance in construction projects, sometimes prioritized even above other significant considerations.

Furthermore, head contractors can face cash flow challenges when clients request proof of subcontractor milestone payments before releasing funds.

This can create additional hurdles and delays in the payment process, impacting the overall progress of the project.

To minimize the impact of retention payments on project timelines, it is essential to have robust systems and processes in place. Automation and digitization of invoice management can help streamline the identification of retention payment requirements, reducing manual effort and saving time.

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Clear communication and collaboration between all stakeholders, including head contractors, subcontractors, and clients, are crucial to managing cash flow effectively and ensuring timely payments.

By addressing the complexities related to retention payments and maintaining a healthy cash flow, construction companies can mitigate the risks of project delays and maintain smoother operations throughout the project lifecycle.

Retention Payments in Construction
Retention Payments in Construction

Simplifying the Process 

Research conducted by APPMVN company, a leading provider of construction management software, has identified a simplified process that can save time, enhance accountability, and ensure compliance with various jurisdictional requirements.

To address this need, APPMVN has introduced a new enhancement to their Invoice Management product, specifically tailored for Australia and New Zealand.

The enhanced features include a retention module that enables project administrators and finance teams to set up to five rules for each supplier or subcontractor invoice or variation.

These rules are automatically applied to determine the appropriate retention payment, streamlining the process and significantly reducing the need for manual intervention.

With the new retention feature, construction companies can easily track and manage retention payments, ensuring accurate records and maintaining transparent financial flows.

This automation not only saves time but also improves efficiency and minimizes the risk of errors or oversights in the retention payment process.

By leveraging the capabilities of APPMVN’s Invoice Management product, companies in the construction industry can simplify their operations, promote better financial management, and ensure compliance with local regulations.

The streamlined process helps facilitate smoother project execution, enabling teams to focus on high-value tasks and deliver projects more effectively.

Accelerate Invoice Approval

The latest enhancement by APPMVN company not only simplifies the payment process but also introduces intelligent features that streamline cash flow and enhance efficiency.

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This results in faster collection, review, and approval of invoices while ensuring compliance with legal and contractual obligations.

Moreover, the enhancement assists contractors in navigating through Security of Payment or retention payments regulations.

The flexibility to easily adjust rules based on different states, contracts, or projects provides adaptability and ensures compliance with varying requirements.

By adopting this enhancement, users are future-proofing their operations in anticipation of potential legislation changes in other states following the recommendations of the Murray Review, similar to what has been implemented in QLD and NSW.

Accelerate Invoice Approval
Accelerate Invoice Approval

This enhancement aligns with the ongoing trend of digitizing all aspects of the construction lifecycle.

From project design and specifications to scheduling and management, the industry is shifting from traditional paper-based processes to digital solutions.

Streamlining billing and payments is a crucial aspect of this digital transformation, as it eliminates delays and enhances productivity.

In the era of cloud-hosted construction, industry leaders recognize the value of integrated digital solutions that encompass financial management along with quality control, safety, and compliance.

The ultimate goal is to improve overall productivity and project outcomes.

Reputation and Payment Reliability

Reliable and timely payments have a significant impact on a company’s reputation, as acknowledged in submissions to the Murray Review.

A solid reputation is crucial for securing major projects and attracting and retaining top subcontractors.

By leveraging APPMVN’s Invoice Management product, companies can enhance their payment processes, improve their reputation, and position themselves as desirable partners in the construction industry. Or you can reference construction management.

What You Need to Know About Retention Payments in Construction To explore how APPMVN‘s Invoice Management product can help your company save time, enhance accountability, and ensure compliance across different jurisdictions, request a demo from APPMVN today.

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