Other large private sector clients such as Thames Water and Tesco have done away with retention. Public sector clients, having taken on the mantle of best practice clients, are also doing away with it. Important government procurers, including NHS Estates and Defence Estates, have erased retentions from their prime contracting arrangements. Progress on abolition is, therefore, proceeding apace. But, some clients still need to be won over. Railtrack demands a 10% retention on all contracts with a value less than £50,000.
Over many years the retention system has become synonymous with fraud and abuse and it has adversely affected small and medium-sized businesses at the end of the payment queue. This has often involved late and non-payment of retentions even where the firm awaiting repayment has carried out its work in accordance with the contract. Moreover, retentions are at considerable risk when parties higher up the contractual chain become insolvent.
The retention ledger for one small business is not untypical. This firm has a turnover of £2m on its supply-and-fix work. As at April last year the total retention account was £116,249. This broke down into 317 contracts with outstanding retentions! There were 79 contracts on which retentions were three years old or more. The outstanding retentions on 21 contracts were almost two-thirds of the total retention account. On the remaining 296 contracts the average outstanding retention was £147. Retentions were invariably demanded on jobs of less than £1000! As much as 20% of turnover can be tied up in retention, quite apart from the prohibitive cost of financing and pursuing their release.
The cost of maintaining cash retentions far outweighs the perceived benefits of the system. They primarily exist to provide clients with a measure of comfort in the event that the contractor does not remedy shortcomings in the works. But on most contracts, retention is never resorted to because it is in the interest of the contractor to remedy any defects during the contractual defects liability period.
One firm has a turnover of £2m. As of April last year, the total retention account was £116,249 – on 79 contracts, retention had been held for three years or more
Retentions do not accord with Rethinking Construction's insight that teams work best if they are tied together by incentives rather than disincentives. Neither should there be a need for retention where inspection procedures are rigorous and the selection process has favoured quality as well as price. I cannot understand the need for retention if target cost arrangements and milestones payments are in place.
There is simply no excuse for public sector clients to continue to demand retentions, particularly if they take their role as best practice clients seriously. Their abolition in the public sector will address many issues that are on the government's own agenda for construction:
Where do we go from here? My advice to readers is to take one or both of the following actions:
Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors Group.