Three years? Something's amiss for sure. I've been reading about retainage etc. and if you look at it from an administrative perspective, it's ludicrous! Besides having to invoice for the retainage every 60-90 days you have to keep very accurate records in your financial journals to reflect the delay in your revenue stream thus preventing you from posting that revenue.. Also, you've got to pay someone if not yourself to track and press your customer to pay it. Furthermore, what about the lost interest on the monies being held back. Don't you think that the customer is earning interest on your money? You bet your sweet bippee they are! Furthermore, your customer has to administer the retainage too. It's a real pain in the butt for them too.
One possible solution that enables you, the labor provider is to consider setting up a Letter of Credit (L.O.C.) with your banking institution that represents 10% of your total annual invoice revenue estimate that you think the customer will give you. Here are the up sides and downsides:
Upsides - First, the L.O.C. will be held in an interest bearing escrow account held by your banker. It will cost you $ XX.xx to do this up front. You won't have to spend the additional resource power in tracking and invoicing the retainage which is being withheld by the company. If at any time your customer tells you that they're going in to withdraw money to cover "X", I can assure you that you've got quality or compliance issues in your operation. The customer can only access these dollars by virtue of delivering a certified letter to your lender and yourself. The only person of your customer's company that can make the withdrawal is an Officer of that company. For the company to do so they have to have a bone-fide reason to do this. Typically, this is a last resort only after they have failed to get you to remediate any problems that your company has created.
The downside - Change! Most contracting companies are used to having retainage taken out of their invoices. Change can be good especially if an L.O.C. costs you 10% of the (10%) value of the L.O.C. to begin with. It's a right-off anyway. Another downside is that if your company really screwed up bad and you weren't on top of things, the customer has the right to go in and seize funds for mitigation purposes. As an example, if your company was under contract to build, deploy, splice, and activate fiber and one of your crews accidentally cut into the wrong fiber bTubes and created a systemic outage which caused the system to deploy their own fiber crews to remedy the situation, then you have an accountability to pay the piper. The customer may hit you up with charges to cover their man-power's time and materials. Also, depending upon the nature and effect of the outage that you've caused, may charge you punitive damages for network downtime which can add up to big $$$. I've never done this personally but I (Once) became so agitated at a contracting company for being so aloof and non-responsive with a healthy dose of incompetence sprinkled on the top, it would have been to easy to just terminate them.
Anyway, for all practical matters (In my humble opinion) that if you operate a first class quality operation who continually check and balance your processes, methods, and procedures, then going the way of an L.O.C. make the most sense.
If you construct underground or aerial plant, this L.O.C. works too. Especially since most of you are warranting your workmanship for at least one year. One thing for certain is that if you do enter into and provide an L.O.C. based on the perceived annual value of your work you must revisit the L.O.C. value each year to either raise it or lower it! If you performed $1,000,000.00 of work last year and posted a $100,000.00 L.O.C. and this year you only expect to generate $500,000.00 you have to lower your L.O.C. exposure to $50,000. Otherwise, if you screw up real bad the customer may be able to draw an amount above the perceived annual value of 10% which would be greater than any retainage.*
* Friendly reminder that the L.O.C. is good for one year after the actual work is performed.
This is just my opinion, I could be wrong. <Dennis Miller>
10% retianage - Different perspective
Member #: 14229
Registered: 1996-2001
Posted:
221
Name:
David M. Rosner
Name:
David M. Rosner
Company:
DR Telecom Consulting & Solar Energy Solutions
Occupation:
Telecom consultant & Solar EnergySolutions
Location:
Based out of CT
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