While the Carillion disaster highlights the need for action on retentions, says Francis Ho, we must not rush into legislation
In Carillion’s wake, attention has turned to cash retentions, which provide security against defects. From a payee’s perspective, the deferred cash flow affects business overheads. Abuse occurs if this money is wrongfully released late or not at all. The latter may likewise occur if the employer becomes insolvent.
It’s worth recalling the Latham report’s admonition that “clients are at the core of the process and their needs must be met by the industry”. Rarely has the sector been slow to identify issues. It’s in deriving solutions to suit a broad pattern of circumstances that the challenge lies. Widespread acceptance of the Construction Act was earned through extensive prior engagement with all parts of the market.
The Department for Business, Energy and Industrial Strategy (BEIS) recently closed a consultation on retentions. This was based on investigations into experiences, substitutes and ways forward that the department commissioned in preparation for the consultation. While BEIS crunches through the submissions to the consultation, we can revisit this earlier research.
Government support for the aldous bill seems doubtful […] Nonetheless, by attracting interest and stimulating further debate, it may have had its intended effect
Those surveyed appeared to accept the rationale for retentions, though there was less uniformity elsewhere. Tier two and three contractors saw late or non-release far more often than tier one counterparts. Justifications included defects that were ignored or disputed, the payee becoming insolvent or a failure to ask for the money.
What’s striking are the conclusions that BEIS couldn’t draw. Crucially, researchers were unable to offer any comment as to whether any late or non-payment of money was justified.
This is significant because any response must be proportionate. We know from the findings that retentions can be abused but, apparently, not how often. BEIS was, however, able to advise that the median retention lost per contractor from insolvency was £10,000 over three years.
During the consultation period, the Construction (Retention Deposit Schemes) Bill was introduced by Peter Aldous MP through parliament’s Ten Minute Rule. Backed by trade associations, the bill anticipates that retentions are held in an authorised deposit scheme.
The custodial residential tenancy deposit arrangements under the Housing Act 2004 formed its primary inspiration. Those reforms followed a damning 1998 report by the National Association for Citizens Advice Bureaux which pointed to large-scale abuse.
New South Wales may present the more relevant comparison. Since 2015, it has run a statutory deposit scheme for retentions where the main contract value is at least $20m (£11.3m). The UK bill envisages that scheme costs would be met by interest generated on deposits. This forgets that, for debt-driven projects, developers would pay loan interest on those amounts. For this reason, the Australian programme levies administration fees instead.
There is no indication of how disagreements over release would be resolved. However, the tenancy deposit scheme includes a dispute resolution procedure. This can struggle with less straightforward situations, which may be why New South Wales leaves disputes to the construction contract. The drawback is that it is less effective in preventing delayed release.
In his motion, Aldous said that legislation to secure retention money was “the only solution”. Even so, the alternatives to a deposit scheme merit scrutiny. Abuse could be discouraged if adjudicators could award costs in claims regarding the money. Insolvency risk could be mitigated by requiring payers to protect retention money using surety bonds. The government could partner with insurers to devise new products. Inevitably, project bank accounts should figure in the debate.
Pre-empting the outcome of BEIS’ enquiries is precarious because a deposit scheme would not cure all ills. Clients could sidestep it by switching to retention bonds and asking contractors to foot the cost. This might then cause inequalities in tendering for bidders with weaker balance sheets or credit histories.
The uncertainty as to how clients may react to legislation stresses the importance of involving them fully and undertaking deeper analysis. This may reveal a more workable resolution elsewhere or through a mixture of measures.
In light of BEIS’ interest, government support for the Aldous bill seems doubtful, which often spells failure for a private member’s bill. The bill has also yet to develop operational details. Nonetheless, by attracting interest and stimulating further debate, it may have had its intended effect. That recent events have whetted the appetite for change is similarly not in doubt. For change, however, the crowd’s support is required as well as its wisdom. There are no easy answers or shortcuts: BEIS should finish its work.
Francis Ho is a partner in Penningtons Manches