Time to let go

The Trade AND Industry Committee in the House of Commons has announced "a short inquiry into the practice of retentions in the construction industry and whether such practice should be perpetuated particularly within the public sector".

Select committees consisting of backbench MPs wield enormous power. This inquiry represents a huge opportunity for the industry to put to bed an anachronistic practice that has become no more than a "cash cow" financed by small businesses.

The Trade and Industry Select Committee is calling for evidence on a number of issues, including: do retentions make any difference to the incidence of defects? Is there a cost-benefit analysis of retentions? Why is it that retentions only apply to one part of the team, namely contractors? What is the impact of retentions on small and medium-sized businesses?

To many, retentions are a form of insurance against defects, but they are poor value for money. Reports of demonstration projects in recent years are often glowing testimonials to those who have substantially reduced defects by adopting new ways of working – mainly through integrated supply teams. Involvement of all the key players in the delivery process is critical.

Someone from client Six Continents Retail recently asked why we need defects liability or maintenance periods. Defects should be managed out during the progress of the work, and handover is completion – end of the job. His point was that he did not need retentions to sort out defects. Rather, he preferred to achieve zero defects through developing appropriate relationships with the supply team. The appointment of firms that are able and competent was vital.

Again and again, those lower down the payment queue kiss goodbye to their retentions because of insolvencies higher up

In any event, 60% of construction is now delivered in factories rather than on sites. How can we continue to justify retentions in respect of items that are made off-site? Manufacturers would not accept this. And how can we reconcile retentions with the drive towards value for money, partnering and incentivisation? I have always been mystified by the requirement for retentions within PPC 2000 – the partnering contract. Retentions are closely associated with the culture of lowest price and defensive contracting. I suppose if I screw somebody down to the lowest price, it is handy to have a nice little retention fund tucked up my sleeve in case they entertain thoughts of cutting corners. Retentions are, of course, part of the adversarial armoury.

The complaint is not just about the principle of retentions. It is also about the extraordinary abuse associated with them. During the retentions campaign I have been bombarded with letters and calls from firms with countless experiences of deception, fraud and manipulative tactics. The fact that this practice provides fertile ground for such abuse is enough reason to get rid of it. The industry is sick and tired of having to throw good money after bad in order to chase retentions.

I have also heard from clients who have benefited greatly from getting rid of retentions. It has helped to change the culture overnight through reinforcing the degree of trust and improving the motivation of the team. Government clients also deserve some praise here. Three of the biggest spenders – Defence Estates, NHS Estates and the Highways Agency – have decided to go down the retention-free route. But local authorities still lag behind.

Latham's proposal for protecting retention funds by either putting cash retentions in separate trust accounts or providing bonds has never been implemented. Again and again, those lower down the payment queue kiss goodbye to their retentions because of insolvencies higher up.