Assessing the Utility of the Retention Bond as an Alternative to Cash Retention for Small-Scale Contractors in Zambia

Abstract

Small-scale contractors, especially in developing countries, face cash flow challenges due to limited financial resources meant to meet operational expenses. The construction client does not help matters, as they normally require the cash retention in order to protect their interests in case of default by the contractor. This study investigated the use of retention bond with a focus on establishing whether it allows the contractor to improve their cash flow. The methodology used consisted of literature review, self-administered questionnaires to contractors and semi-structured interviews to clients. The respondents were contractors in grades 4 and 5 though small-scale contractors go up to grade 6, as these are more likely to require a retention bond on the projects they are engaged in. The study focused on small-scale contractors’ cash flow only in relation to the use of retention bonds. The study established that retention bond offers more benefits to both contractors and clients by enhancing project cash flow whilst providing the same security as cash retention. Contractors’ ability to meet day-to-day expenses is critical to successful completion of projects. The study has established that financial institutions offer the retention bond, which is cheaper for the contractors compared to cash retention; therefore, contractors can utilise the bond to enhance their cash flow, thereby increasing their ability to meet project cash flow requirements.