Updated: Nov 21, 2021
It's time to reconnect reward to performance
A building contract is the Contractor agreeing to deliver a quality-built product on time, in return, the customer agrees to pay on completion of a quality-built product being delivered. Progress payments are a practical way to operate a business cash-flow on large projects but anything in the agreement that separates performance from reward, is open to disruption, dishonesty, and disappointment.
Due Diligence before saying "No" to Risky Customers or Cowboys who demand Cash Deposits up front
How many times on FAIR GO do we see a trade service offer include the requirement for a significant unsecured cash deposit and then the service provider fails to deliver? Often these are repeat offenders who have no intention of doing a quality build or any build at all. No one should have to pay ahead of performance in any contract for a service. Demanding a unsecured cash deposit before going into a contract blind, disconnects reward from performance, and is never a substitute for marching into comprehensive due diligence and exercising discretion, (saying no). If we eliminate unsecured cash deposits, we reconnect performance with reward, and ratbags can’t hurt innocent consumers.
Retention's Must Die
Retention's are also rationalised as necessary for surety of performance in case of defects arising. Hogwash, they only exist today because they disconnect reward from performance also. The formula for calculating retentions is a Ponzi scheme depositing huge amounts of subcontractor’s cash into main contractor’s bank accounts, superfluous to the needs of the contractor to offset retentions held by the client on them. When the main contractor has a bad job, someone else’s cash is readily available to cover it up. So long as business turnover remains steady, (no boom or busts), then even amounts of retentions will wash in and out of the main contractor’s account.
No-one needs to know about these undisclosed, unauthorised, unsecured zero interest rated loans, unilaterally arrange by the Main Contractor for the Main Contractor’s sole benefit. Nothing to see here folks!
The need for retentions to cover the risk of defects is a myth. Having established your Reputable Contractor has a strong balance sheet before signing them up, retentions are superfluous to providing surety of performance. Retention's are for the under-capitalised, the greedy, and the lazy.
Retention's are "The Fools Gold" of Performance measures
Retention's achieve the opposite to what they purport to resolve, they create an environment for defects to be left behind. In my many years of service, managing subcontractor accounts for main contractors, there are three types of subcontractor, with regards to retentions;
1. The “A” subcontractor. Well capitalised, doing top quality work, on time, defect free. They fix anything required when the matter arises, and they never have a defects list to address. They wait for retentions and collect them when due. Everyone wants them on their job, and they charge what they are worth including the cost of funding retentions;
2. The “B” subcontractor. Like the “A” subcontractor, but a little under-capitalised and only turns up to clear the defects list when they have spare resource to put to beneficial use. There is no cash for the work when it is carried out, but there will be in the future and the wages can be paid instead of putting staff on gardening leave;
3. The “C” subcontractor. A very good subcontractor but is under-capitalised. Very competitive at tender time but deliberately leaves work to be completed later. Only turning up to clear defects, just before retentions are due for release, so they can feed their family at the end of each week’s work.
You cannot eliminate defects at Practical Completion when using under-capitalised subcontractors, until you eliminate retentions, insist on performance, and pay for it.
The magic words are… Quality now please?
I’ve had the privilege of witnessing a Certified Builder deliver a $1M alterations and additions project on a tight site on time and defect free. The hour long walk around the site at completion with the client, the architect, and the Certified Builder produced a one-page list of notes of new items the client would like done and two minor defects fixed in two days. The trick our Certified Builder employed was to demand performance in time and in sequence with the project plan and reward that performance by paying for it in full. No retentions are held on subcontractors. The magic behind the trick is to constantly measure quality as work progresses and never let a sub-trade move forward, leaving defects behind. They soon learn the standard expected and are happy to perform for the reward on offer.
The same builder allows his clients to hold retentions on him, because he has done his due diligence, and is confident his performance will be rewarded.
If you have defects, you have not finished your work in time and in sequence, and you will not be paid in full. The cost to complete is withheld, as it always should be, until the work is done. This is not a retention. Retention's are arbitrary and unnecessary. Withholding payment beyond completion for defects is a measure of failure to deliver defect free quality, first time.
All our clients deserve defect free quality work on time and all clients should pay in full for completed works without deduction. Unsecured cash Deposits and Retention's make us lazy. Keeping reward measurably linked to performance, lifts performance, and is the key to creating a great customer experience.
This article was originally published in the Certified Builders "InHouse" magazine under the title "Time to Reconnect Reward to Performance" in June 2021.
“Celebrating 50 years of New Zealand Building Economist 1972 to 2021”
By Matthew Ensoll
Editor New Zealand Building Economist.