It looks as though it is finally time to rethink the practice of withholding cash retentions on building projects
Post the completion of the government’s consultation on retention payments, the Department of Business, Energy and Industry Strategy (BEIS) officials are seeking views from the industry, in particular clients who were under-represented in the response to the consultation. A backbench MP has tabled a Private Member’s Bill on the subject and it has been reported that the Bill has some significant backers, both in the industry and in Parliament. It looks as though it is finally time to rethink the practice of withholding cash retentions on building projects.
Retentions have been around for longer than many of us can remember. The recognised purpose of the retention procedure has been to incentivise the contractor to complete its works. If a job has largely been finished it might otherwise be hard to focus the contractor’s efforts on completion.
If the practice is indeed to be abolished, alternatives amounting to similar incentives for contract completion should be put forward
So, what’s the problem? Surely retentions simply focus contractors’ minds to finish the job and finish it properly? Well, yes but the sums involved can be very significant. Additionally, the money really belongs to the contractors whose business model is heavily cash reliant. Most contractors could do with their cash as soon as possible, particularly when they operate on razor thin margins.
One of the historic concerns is how retentions affect the supply chain. Existing prompt and fair payment measures, such as the Construction Supply Chain Payment Charter (the Charter), the Prompt Payment Code (the Code), Project Bank Accounts (PBAs) and Public Contract Regulations whilst going some way in offering protection are not widely used. The Charter, Code and PBAs remain voluntary in both the private and public sectors; the Public Contract Regulations are only applicable to the public sector (some public sector projects are exempted); and PBAs and the Charter are cost and time heavy. The recent collapse of Carillion has left an estimated 30,000 unsecured creditors staring at returns of less than a penny in the pound. Many of the 30,000 are SME sub-contractors who entered into sub-contracts with similar retention provisions and that retention money, technically belonging to the subcontractors, was in Carillion’s hands at the time of its liquidation, and was not ring-fenced.
If a new mechanism is introduced to protect retention monies and cash flow down the supply chain, then it is vital that the interests of all parties are properly balanced
The contagion of a large scale contractor insolvency could be disastrous and widespread and, crucially, exacerbated by retentions. The issue has been picked up in the government’s consultation and the Private Member’s Bill is to get a second reading in the House of Commons in the Spring. The proposal is to phase out the practice by 2025. Some clients are willing to consider retention bonds in lieu of cash retention, although the availability of those at a cost acceptable to the client is not a viable option for some contractors (for less established firms or those bidding for sizeable projects relative to their balance sheets). One alternative put forward by sub-contractor lobbyist groups is for a retention deposit scheme much like the tenancy deposit scheme so that (unlike the situation with the victims of Carillion’s demise) retention funds would be protected in an insolvency scenario.
We shall have to wait and see how the issue is handled in government over the coming months. But it is worth considering the implications if retentions are to be outlawed. If the practice is indeed to be abolished, alternatives amounting to similar incentives for contract completion should be put forward. These could include systems used in other countries such as trust mechanisms, project bank accounts or defects liability bonds, none of which are without their issues.
What about zero retention. That would be likely to result in practical alternatives (possibly a reduction in the contract sum payable) being sought by clients.
Whilst everyone in the industry will shudder at the fall-out from Carillion and many will point the finger at slow payments through the supply chain making the situation worse, a balance has to be struck. The government is interested in exploring a retention deposit scheme or ring fencing and holding retention on trust which is administratively burdensome and monies may need to be borrowed to pay into the trust.
One thing is for sure: if a new mechanism is introduced to protect retention monies and cash flow down the supply chain, then it is vital that the interests of all parties are properly balanced.
Stephanie Canham is national head of projects and construction at Trowers & Hamlins LLP