Retention funds waste everybody’s time and achieve nothing of value. Here’s a case that shows, yet again, why we should ditch them
There is a very big commandment that applies to your construction contracts: “Every construction contract shall provide an adequate mechanism for determining what payments become due under the contract and when.” It caught out the developer when his subcontractor knocked on the door for his retention. There wasn’t an “adequate mechanism” for releasing that pot of money. Come to think of it, there are probably thousands of retention pots stuck with inadequate mechanisms on shelves up and down the construction world. Potty.
AMW Plumbing and Heating contracted with Zoom Developments to carry out the plumbing for three blocks of new build flats in Cumbernauld. Block One was completed April 2008; Block Two in October 2008. All’s well so far. The work is good, the interim payments happily made, the retention fund is in the contract. The pot gets bigger. Kerplunk. The wheels fall off the relationship. Zoom paused in building the third block.
And two years later is still paused. The plumber pointed to the pot. He wanted his retention. Zoom pointed to their subcontract rules which say: “The 5% retention will be reduced to 2.5% on practical completion of the development and remaining lump one year later provided no outstanding defects.” And I bet that you will say those words are all very well but hardly anticipate putting a mighty big pause on the work while holding on to the retention pots.
Zoom told the Scottish court that until such time as the third block was built, the plumbing contract was incomplete - so the retention pot stays on the shelf
Well now, Zoom’s rules also say: “Zoom reserves the right at all times and with no liability for compensation … to suspend work or vary the amount of work in the contract at their sole discretion.” So Zoom told the Scottish court that until such time as the third block was built, the plumbing contract was incomplete and no practical completion was reached - so the pot stays on the shelf. In court Zoom’s lawyer was candid; his client’s terms, he said, may be “unpalatable” but nonetheless the contract was required to be enforced and until the third block was completed, practical completion would not occur. The subcontractors could not therefore recover the retention money. And let me tell you that the Scottish judge agreed that on the words in this subcontract, Zoom could elect not to build the third block of flats for many years, avoiding practical completion and no retention would flow.
But now comes that commandment, cast in stone by the Construction Act, that there has to be “adequate machinery” for determining what money is due and when. Easy, said Zoom. Simply because the speed or non-speed of the works was a matter for them and simply because Zoom could dictate when practical completion might be, none of that indicated the mechanism was inadequate. The judge didn’t agree. He said: “I fail to see how it can be deemed ’adequate’ for contractors to have to wait for their employers to take a particular step - which they alone control - before contractors can receive payment for work properly carried out in conformity with the contract”. He reminded us that retention exists to provide the employer with some security in the event that defects arise following their taking possession of the site.
So now what? If the machinery in the contract doesn’t comply with the rules in the Construction Act then the Scheme applies. This is a separate set of rules via a statutory instrument that lays down what is to be done when the party’s contract fails to satisfy the Construction Act. The Scheme explains that when a construction contract fails to provide adequate machinery, payment is the value of any work performed in accordance with the contract. So since the work was all OK in November 2008, and since it is payable seven days after the plumber makes his claim, and since there is no mention anymore of retention pots, the contractor gets his cash.
It is now 45 years since Sir Harold Banwell, in his government report into construction industry efficiency, recommended gradual abolition of retention. Just how long is “gradual” intended to be? If it is the length of time taken to realise that retention funds are more trouble than they are worth, achieve nothing of value and waste time, I can see another 45 years of pots and pottiness.
Tony Bingham is a barrister and arbitrator at 3 Paper Buildings Temple