Chasing payment of retentions is a routine and recurring headache for contractors and the introduction of the Construction Industry (Protection of Cash Retentions) Bill by Alan Brown MP was welcomed by many in the construction industry.

If this Bill becomes law, it will mean that retention money held under a construction contract will have to be placed in a deposit scheme, which would have the effect of ring-fencing and protecting cash retentions.

There is no current legislative requirement for anyone holding a retention under a construction contract to keep that retention money safe, separate and ready to be paid to the recipient once all contractual obligations have been fulfilled. This lack of regulation can lead to dubious practices which can cause problems for those seeking payment of retention money owed. 

It will therefore be disappointing news for many that the second parliamentary reading of the Construction (Retention Deposit Schemes) Bill has been delayed for a fifth time.

Why are retentions necessary?

A retention under a construction contract is a percentage of the value of the works that is held by the employer in the case of the main contractor or by the main contractor in respect of its sub-contractors. Retentions are usually paid in part once works have been completed, with the remainder paid once any defects that appear within a fixed period of time have been fixed.

A retention provides:

  1. An incentive for contractors to complete the work on time;
  2. An incentive for contractors to return to fix defects occurring after completion of their works; and
  3. A pot of money to remedy defects in the event contractors do not return to remedy these.

Problems with retentions

Unfortunately, there is a well-established practice where retention monies are held for longer than contracts allow causing cash flow problems (and even insolvency) for those to whom money is owed.

A report prepared by Pye Tait Consulting for the Department of Business, Energy and Industrial Strategy in 2017 reported that over 70% of the contractors surveyed have experienced delays in receiving retention money in the past three years, and around half have not received retention money owed to them at all.

Whilst there may be legitimate reasons for late or non-payment of retention money (such as disputes over defects or up-stream insolvency), some argue that non-payment of retentions is in fact a means of boosting the cash flow of main contractors or can be seen as a means of facilitating a discount on the overall cost of a project by not paying back some or all of the retention.

Alternatives to retentions

The Construction Industry (Protection of Cash Retentions) Bill is the latest of many attempts to address the injustice and commercial difficulties that can arise through the misuse of retentions. Whilst alternative mechanisms exist (parent company guarantees and retention bonds for example) none of these are without issue and few are as simple as cash retentions.

Some argue that retentions should be abolished altogether, highlighting serious issues with the retention regime, such as the £800m of retention money being held by Carillion when it became insolvent. A ban on retentions, it is argued, would lead to an increase in working capital within the supply chain and the removal of the threat of unfair payment would improve the quality of works at completion. 

The future of retentions

Meeting the demand for high quality works and the efficient remedying of defects whilst keeping cash flow in the construction industry moving continues to be a difficult balance to strike. In the absence of a new legislative regime for retentions, it is more important than ever to make sure your construction contracts are properly drafted to offer the right level of protection for your project or for works you are carrying out. Proper procedures to recover retentions after works are completed and defects are rectified will help avoid ambiguity about what retention money can be recovered and when.

At Myerson, our Construction Team offers advice on all aspects of contentious and non-contentious issues, acting on matters ranging from home extensions to large commercial developments. For more information on the range of legal services we can provide, please call Myerson’s Construction Team on 0161 941 4000 or email lawyers@myerson.co.uk.