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Performance security is insuring the client against lack of performance by the contractor which is if the contractor fails to fulfills its contractual ogligations ( portion of work not done). This money can be used to client to hire another contractor to complete the contract work.
On the other hand, retention money is a portion of the approved invoice amount from contractor which is retained by the client to cover the defects in work (pending NCR reports) between its technical completion (preliminary acceptance) and final acceptance. After the contractor rectifies the defects and closes all NCR, then this amount is released
Retention is a percentage (often 5%) of the amount certified as due to the contractor on aninterim certificate, that is deducted from the amount due and retained by the client. The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract. Retention can also be applied to nominated sub-contractors, and the main contractor may also apply retention to domestic sub-contractors.
Actually it is just to keep the supplier relatively more and more involved because monatory interests make more responsive and careful.
Agreed with expert opinion
There is no question of performance guarantee (PG) and Retention money in one platform. if performance guarantee is there then retention money can be released. at the time of tendering some companies may insist for retention money but when the contract awards and the contractor submits the PG then the retention can be released. it will help the company to avoid audit objection. the use of PG and retention money is the same after completion of work there should not be any trouble to the from the contractor to the company for getting any service related to the work. if the contractor fails to meet the terms and conditions fails the company can revoke the retention money. Mainly performance guarantee wll taking in case of any machinery purchase. in case of awarding any work Retention is the best option.
What is the purpose of holding money as Retention Money when we already have Performance Security to guarantee security during defect liability period?
Retentions are a unique and relatively new feature of the construction industry. A retention is an amount of money which is withheld by a head contractor or client from the contractor or subcontractor as security to ensure that party meets its obligations under the contract, in particular to provide defect-free building work and complete its work on time.
Most standard forms of building contracts calculate the retention on the basis of a percentage of the contract price.1 Depending on the value of the contract, this is somewhere between 5 per cent and 10 per cent. The retention is then deducted from each payment to the subcontractor and paid out in two stages: 50 per cent at the date of practical completion2 and the remaining 50 per cent once the defect liability period has come to an end and all the defects have been rectified. Defect liability periods usually last for 12 months after practical completion, but can be for anywhere from three to 24 months.3 Bonds and guarantees were also and remain a common form of security used in the industry. For example: (a) Performance guarantee: a third party (for example, a parent company) guarantees the performance of the contractor (for example, the contractor will comply with the terms of contract). If the contractor fails to perform, the third party will pay up to the amount of the guarantee. (b) Bank bond: a form of security provided by a bank or financial institution to a contractor in favour of the client, which again is designed to secure the contractor’s performance of its contractual obligations. It is a promise to pay an amount of money, typically unconditionally and on demand.
The purpose of holding money as Retention Money
Expressly allowing head contractors to mix retention money in with other funds is problematic when considered in the context of general trust law. It is a fundamental and uncontroversial principle of trust law that trust property must be identifiable in order for a trust to exist. 30 Subcontractors may find it difficult to identify their retention money if such funds are mixed with other subcontractors’ retention money and/or funds belonging to the head contractor. If the head contractor withdraws funds from that account for other purposes, it can be difficult at times to determine whose money was withdrawn from the account and at what time. This makes it difficult for the subcontractor to identify the money it is entitled to and can prevent subcontractors (as beneficiaries) from claiming their retention money back.
The importance of whether the retention money is held “on trust” and is identifiable is highlighted in the event of insolvency of the party holding the retention money. If the retention money belongs beneficially to the party from whom it was deducted and is no longer part of the assets of the company in liquidation, then subcontractors will not need to be concerned with where it ranks in priority with creditors as it will not fall into the pool for distribution.
Generally the billable work to be done by the contractor between the substantial completion and overall completion is too less for the contractor to motivate him to complete the pending Jobs ( Punchlist work). Retention money is paid at the end of overall completion, so the intrest of the owner for getting a complete product is protected.
Performance Security is a safe guard against non - performance as per technical specification and coverage goes beyond overall completion into the warrenty period.
