Thukten Zangpo 

Contractors will see improved cash flow following the finance ministry’s new rule that allows them to withdraw retention money against a bank guarantee upon project completion.

The change, effective January 31, comes under the prime minister’s directive and follows a review committee’s recommendations submitted to the Cabinet by the Ministry of Infrastructure and Transport.

Under the revised policy, contractors working on projects valued between Nu 5 million and Nu 50 million can now reclaim their retention money immediately after project completion—provided they furnish a bank guarantee from a reputable financial institution acceptable to the procuring agency.

Retention money is like a security deposit that the client holds back from the contractor during a project. It ensures the contractor fixes any defects or issues before getting the full payment.

According to the Procurement Rules and Regulations, retention money is equivalent to 10 percent of the payments due to the contractors.

The finance ministry stated that for contracts over 12 months, once 50 percent of the work is done, the procuring agency can allow payment if the contractor provides an unconditional guarantee.

“Such a guarantee shall be valid until the issue of a no defects liability certificate,” it added.

While, the remaining 50 percent may be returned to the contractor on completion of the assignment under the contract against the submission of an unconditional guarantee.

This policy shift applies to all ongoing projects and those currently within the defects liability period, allowing contractors to substitute retention money with an equivalent bank guarantee.

The Construction Association of Bhutan (CAB) has welcomed the decision, describing it as a much-needed boost for contractors struggling with cash flow constraints.

The President of the CAB, Trashi Wangyel, said that until the end of 2023, procuring agencies had returned retention money against bank guarantees after project completion. However, a 5 percent holdback policy remained in place, tying up funds even after the project period had ended.

The procuring agency kept this retention money for the security of the defects liability period.

The defects liability period, also known as warranty period, is a specific time frame after the construction project is completed during which the contractor remains responsible for rectifying any defects or faults that may appear in the work.

It could be a minimum one year or more based on the contract agreement.

“This restriction significantly impacted cash flow,” he said, adding that the new rule allows contractors to leverage bank guarantees for financing options, such as loans and overdrafts, ensuring smoother operations.

Trashi Wangyel added that the contractors’ liabilities are taken care of by the bank guarantee where banks hold their assets and government risk is guaranteed by the banks.  “In case of any liability in works, the bank guarantee can be converted into loans or overdrafts,” he added.

Contractors also expect more changes in the procurement rules and regulations in the beginning of next fiscal year, starting from July this year.

The finance ministry has also introduced new requirements for top bidders in public tenders. If a winning contractor lacks the necessary staff or equipment, they must submit a commitment letter before signing the contract, promising to meet the requirements. Contractors must adhere to these commitments, with penalties imposed for non-compliance.

Contractors must deploy equipment only when required, as per their work plan and deployment orders. Failure to provide equipment on time will result in penalties.

The ministry has also expanded eligibility for engineering roles in the construction sector. Previously, only engineers with bachelor’s degrees could qualify. Now, fresh graduates or diploma holders with certifications in Construction management software, Occupational Health and Safety, E-government procurement, Refresher courses from the Construction Development Board and Bhutan Construction and Transport Authority will be accepted for recruitment.

Currently, there are 2,800 registered contractors in the country, including 300 large and medium firms, employing more than 10,000 people.

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