Government launches new consultation on cash retentions

The government has launched a new consultation on the practise of cash retention under construction contracts following an independent review.

For most projects entered into prior to legislative changes on 1 October 2011 retentions, which is a percentage of the value of a construction contract held by the owner of the contract, were split into two halves with the first half paid upon practical completion of the work.

The second part of the retention was then paid after the issue of the ‘certificate of making good defects’, post-inspection, which was typically 12 months later during which any defects were identified and rectified.

However, following 1 October 2011 the payment of a retention can no longer be linked to an act or event occurring under another contract, and release of retention must be triggered by a specific act or event within a sub-contractor contract.

The review reported that three-quarters of the contractors surveyed had experienced cash retention in the last three years and of those 71% had experienced delays averaging several months before receiving the retention monies.

The delays were found to be significantly longer for tier 2 and tier 3 contractors compared to tier 1 contractors. Across all the tiers 74% said it was typical for retentions to be held for a 12-month period after practical completion. But in practice, retentions were on average held for 18 months, the survey found.

The review added that 44% of contractors with experience of retentions in the last three years had experienced non-payment of the retention monies as a results of insolvency by a contractor higher up the chain or a client.

However, the retention monies unpaid as a result of upstream insolvencies occurred on only around 1% of all the contracts, over the last three years, the review said.

Over half of tier 2 contractors and 64% of tier 3 contractors, who had retentions held against them over the past three years, experienced at least one instance of insolvency from higher up the chain and lost monies retained because of it.

On average, the money lost by tier 2 contractors was £25,900, while tier 3 contractors lost £24,600, the survey reported.

However, the survey only had qualitative evidence that suggested late or non-receipt of retention payments could contribute to business decline and lead to insolvency.

Meanwhile, the SEC Group reports that an estimated £7.8bn of retentions have gone unpaid across the sector over the last three years and that the livelihoods of many SME contractors are affected by the practise of retentions. The SEC Group has also called for the protection of cash retentions within a statutory framework.