Should trust funds be set up to ensure subcontractors get retentions?

Construction worker

Rudi Klein returns to his dislike of retentions (1 March, page 45), as one would expect of the chief executive of a subcontractors’ lobbying body. He argues either for their abolition or placing them out of reach of liquidators, trustees in bankruptcy, or administrators, by setting up trusts that would ring fence the money. As he points out, it is unfair to the subcontractor who has fulfilled his duties, to be denied release of his retention.

But he omits to recognise an important player: the client. Having paid out the major part of the contract sum on account they have to wait for the finished, fully functioning building. They need the reassurance of the retention fund. The client should always have the reasonable expectation that there are funds retained which would pay for completion of his building. That is a truth which Klein will not like to hear. One is curious to learn how he would propose to protect the client if retention were abolished.

Putting the retention into a trust fund is an interesting proposal. Release of a half at practical completion and the remainder on issue of the certification of making good defects would normally trigger payment to the contractor. However, to take Klein’s example, where the subcontractor lost his retention because the contractor had failed, I see problems, if there are no back-to-back agreements in place, permitting the client to pay subcontractors directly. Provision for a fund would have to be included in standard contract forms. Klein may like to explore this with JCT.

I doubt if Klein’s wish for legislation to change the status quo will cut much ice with parliament, because the trust arrangement he proposes would defeat the long-standing practice that all except preferred creditors in a failed undertaking have to take their places in the queue to share whatever is left.

Malcolm Taylor, FRICS, Lancaster