There have been problems with retentions ever since they were introduced to ensure builders finished a job to a good standard. But finding an alternative has proved elusive

Peter Hibberd

Problems with retentions have been around for years but not everyone has a problem. Perhaps that is why, despite much discussion, no one has come up with a universal solution. So what are the problems? That depends on who you ask.

The generally accepted view is that retention was introduced to provide an incentive for the (sub)contractor to complete the works and so the payer has some protection against latent defects in work paid before its completion. This is because construction works are different from buying a product off the shelf, where generally one sees what one is getting before paying.

Because the amount of retention varies over the duration of a project and the nature and extent of any latent defects cannot be known, it is evident that it cannot entirely fulfil those objectives. However, many payers argue it is better to retain some money even if the amount retained turns out to be inadequate. For those opposed to retentions this shortcoming has been used as part of the argument to abolish its use, but the main problem is one of reduced cash flow on account of holding retention.

Obviously release of retentions later than expected is an issue because it can create problems with solvency. If the release is delayed because the supplier fails to do what it should, that is its own problem. When retention is wrongly withheld, that is another matter. Wrongful withholding may arise in two ways:

  • If it is believed that the conditions for its release have not been met but where later it is shown that this was not the case – a question of misinterpretation leads to breach of contract
  • If a retention is deliberately withheld - a breach of contract and moral abuse of contract terms.

There are remedies for when retentions are wrongly withheld, which include adjudication. Yet for these to be effective there must be a willingness to use them and some see remedies such as adjudication as a hammer to crack a nut. Others believe the use of such remedies adversely affect business relationships. Consequently, abolitionists argue that the operation of retentions should not rely on such remedies.

There could be many tweaks to the current system of retentions but modifications that significantly change things for the better appear limited

But even if one accepts that the current system of contractual retentions does not work, does that mean it needs to be abolished or just modified? If abolished, is an alternative required?

There could be many tweaks to the current system of retentions but modifications that significantly change things for the better appear limited. One such proposal is that all retention funds in construction contracts should be held in protective trusts. Under JCT contracts this has been available to contractors for years and, prior to the withdrawal of nomination provisions, also to nominated subcontractors. It is currently not available to subcontractors. There is an argument for extending this protection to them, even though it only addresses insolvency of the payer, but one can see resistance because of the additional administration required. However, this need not be an impediment if only applied to retention funds in excess of a specified sum.

Those who support the abolition of retentions say that the appropriate approach to protect the buyer is through proper contractor and subcontractor selection, where the incentive for the contractor or subcontractor to satisfactorily complete the work is its reputation and the opportunity for it to carry out the next project. This can work but clearly has greater relevance to repeat clients.

Although retentions are a problem on many projects, for many others it works reasonably well. Also, the nature of the problem may well be different depending on whether one is an employer, contractor or subcontractor. However, if neither modification to the system of retentions nor its abolition is generally acceptable, what are the alternatives?

A retention bond (an example of which is contained in many JCT Contracts) is offered by a surety up to a given sum until released under the conditions of the bond in return for a premium. The amount that is recoverable under the bond is that which would have been recoverable had the retention provisions operated, subject of course to any maximum sum and fulfilment of the bond conditions. A performance bond is somewhat different in that it covers failure to complete the works and therefore provides greater security.

The use of bonds and indeed guarantees provide more security and improve cash flow to suppliers but there is a cost that has to be born and an impact on potential borrowings. Also conditions still have to be met and failure to do so may create difficulties in securing subsequent provision.

Reconciling the different views has proved intractable and however one looks at the issue of providing security for defects there are problems. Although retention and performance bonds may be preferable in some instances, the answer must lie in ensuring whatever approach is adopted that it is properly adhered to - something often lacking. That surely must be preferable to endlessly debating retentions with a view to enacting legislation.

Peter Hibberd is the past chair of the Joint Contracts Tribunal