Factoring Companies Guidebook
Retentions
Definition
Any amounts that the customer can rightfully with hold from the initial payment. This may be retention for ensuring the quality of the work, such as in the construction industry, or as required by law, where the Client supplies contract labour without producing the relevant CIS certificate.
Concerns
Effectively the collectability value of the invoice is diluted by the amount of the retention.
Identification
Retentions are prevalent in the construction industry and all industries associated with it can be identified through a review of the remittance advices and of the sales ledger open item report. The tax deduction occurs only in the contract labour industry.
Treatment
Prepayments should be reduced by the percentage of the prevailing Retention where these are rife. Where only evident on a few customers, then these may be able to be controlled through the implementation of reserves. Any decision should be founded on the terms and conditions of sale, as even with a reduced prepayment, or reserve, if the product/service does not prove to be of the required quality, there may be the potential for damages claims. Any such claims, will not only preclude the repayment of the Retention, but if in excess of the retention amount, may lead to a claim for reimbursement of prior payments for the job and/or offset against other outstanding invoices.
Review the overriding contract; it is likely that such arrangements will be considered unfactorable.
