The use of retentions is an ongoing problem for specialist contractors, but what alternatives, if any, exist? BSRIA research aims to find new ways of working.
The latest research from BSRIA estimates that the amount currently held in retentions is some £470 million. This equates to 3% of m&e contractors' turnover. Overall, the bulk of money held in retentions – 80% – is typically held for 6-24 months, but 0·5% is held for more than three years. For firms with more than 20 staff, it is more likely for money to be held for 12-24 months.

In business terms the practice of holding retentions poses real difficulties to specialist contractors in terms of:

  • cash flow problems – the average profitability for over 50 companies surveyed in 2000 was 4·2%. The money held in retentions formed a significant percentage of their profit – 77% overall;
  • resources needed to chase outstanding money – respondents confirm that money is very difficult to collect. A common complaint, this time from a firm with ten staff, is: "Firms very rarely voluntarily pay retention. It has to be continually chased, involving time and phone calls";
  • poor client/supplier relationships – there are very few justified calls upon retention. In contrast, the number of unjustified delayed payments of retentions is a major concern.

Figure 1 shows that 54% of individual retentions are valued at more than £40 000. In firms with over 50 staff this increases to 69%. This is where cash flow really counts.

Conversely, small firms with ten or fewer staff report that 93% of individual retentions are valued at less than £1000. For these companies, the resources needed to chase outstanding money are totally out of proportion to the value. Therefore, for such small projects, where the risk to the client is low, there is a very strong case for having a no retentions policy. As one eight-strong contractor says: "Retentions should not be applicable on projects under a certain size, say £50 000 to £100 000. The paperwork to follow up, plus phone calls are not worth the effort at times."

Rethinking retentions
The challenges facing the construction industry, as promoted in Sir John Egan's Rethinking construction report are:

  • to improve client/supplier relationships;
  • to work more collaboratively to improve the image and delivery of UK construction.

The practice of holding retentions is a barrier to changing the industry's culture from one of mistrust and blame to one of greater trust, openness and efficiency. The current practice of assigning retentions does nothing to improve quality – in short, it is an ineffective way to assure a zero defects culture.

The current practice of assigning retentions does nothing to improve quality

So what are the solutions? BSRIA's research shows that a zero defects culture will be better achieved through selecting contractors on quality and price (and not on lowest price only) and from partnership trading arrangements.

Are there alternatives to the existing practice of assigning retentions? The answer is yes, and these are explored in BSRIA's recent research. The findings are available in a handbook and a guidance document, which comprises three case studies. Both documents are downloadable from BSRIA's web site – www.bsria.co.uk.