Readers should use the general election to send prospective MPs a message about protecting cash retentions from insolvency risk

Rudi Klein

Since my last column for Building on 18 November 2014 on protecting retention money, there have been some developments which, I think, are worth you knowing about.

On behalf of fair payment campaigner, Debbie Abrahams MP, I drafted an amendment to the Small Business Bill which would have required regulations to protect retention money against upstream insolvencies by placing the money in trust.

Prior to committee stage in the House of Commons, the amendment was re-drafted to allow for a two-stage process. The first stage would provide for regulations to require large firms to publish their contractual terms governing retentions and a subsequent review of those terms.

Further regulations would then have been introduced with the primary aim of protecting retentions from insolvency risk.

The amendment was withdrawn to allow for discussion on the subject to take place between the government and the opposition. Last month it was re-laid in the House of Lords by the opposition.

The government’s position was that project bank accounts (PBA) would resolve the problem since retentions could be placed in the PBA - which had trust status. Needless to say, this response was unsatisfactory. At this stage, use of PBAs is confined to parts of the public sector. Moreover leaving a retention in the PBA is unlikely to help subcontractors in the event that the client decides to have recourse to the whole of the retention fund because a tier 1 contractor has gone into insolvency.

This issue may arise again in the Lords but, in the meantime, the possibility remains that under the Small Business Bill large firms will have to report publicly on the time taken to release retentions and any security provided.

The Public Contracts Regulations 2015 now require that all public bodies ensure that in all supply chain contracts (through to sub-sub-contracts), payments are made within 30 days of verified or undisputed invoices. Guidance will be issued on how this provision
is to be applied in construction contracts. It is to be hoped that the guidance will also deal with how the 30-day requirement is to be applied to the release of retention money.

By giving retentions trust status, the aim appears to be to give them priority over money owed to other creditors in the event of the insolvency of the party holding the money

There have also been significant developments down under. On the first of this month new regulations came into force in New South Wales. They were introduced under the NSW Construction Industry Security of Payment Act - similar to our own Construction Act. The regulations require that retention cash is to be placed in trust with an authorised deposit-taking institution. Initially this will apply to projects valued at over A$20 (just over £10m) but the likelihood is that this figure will be reduced. The statutory duty to place the money in trust is imposed on the tier 1 contractor in respect of retentions deducted from tier 2 contractors. The Construction Contracts Act 2004 in Western Australia already stipulates that retentions have trust status.

The developments in Australia and New Zealand reflect existing statutory protection for retentions in France, Germany and in many states in the US.

The New Zealand parliament is currently considering the Construction Contracts Amendment Bill (amending the 2002 Construction Contracts Act). This will give trust status to cash retentions but there will not be a requirement to place the money in a separate account. By giving retentions trust status, the aim appears to be to give them priority over money owed to other creditors in the event of the insolvency of the party holding the money.

I repeat the advice in my last article. Ask your paying party what steps they will take to safeguard your retention money. After all, the money belongs to you. If large sums are involved, ask the adjudicator to decide that the other side places the money in a separate account.

I recently received a communication from a small civil engineering firm in the North-west.

It is a £4.5m-turnover business. Due to upstream insolvencies, the firm has lost £240k worth of retention money over the last five years. We must end this scandalous state of affairs.

Finally, a general election is looming. Get a commitment from prospective MPs to force an amendment to the Construction Act to put retentions in trust.
Professor Rudi Klein is a barrister and CEO of SEC Group