Government urged to set good example by ending cash retentions on public sector projects.
Specialist contractors want the government to set an example to the industry by ending the practice of cash retentions.

Rudi Klein, legal adviser to the Constructors’ Liaison Group, is lobbying the Treasury over the system by which main contractors or clients keep back 3-5% of money owed as an insurance against latent defects. Half is paid on practical completion, the other half a year later.

Klein said: “Achieving Excellence [the Treasury’s manifesto for improving the state’s construction procurement] promotes trust, but cash retentions hark back to an era of mistrust. Government wants to be a best practice client; here is an opportunity to prove it to the rest of the industry.”

In any case, Klein said, retentions are unnecessary. Subcontractors would not jeopardise repeat public sector work by failing to remedy defects. He estimated that retentions cost the construction industry more than £1bn a year.

Klein said that influential members of the government have expressed support for the move, including environment minister John Battle and Treasury minister Barbara Roche. And an official with the government’s Procurement Practice and Development group, which is promoting Achieving Excellence, said the idea of abandoning cash retentions had not been ruled out.

One contractor was critical, however. He said: “Retentions were introduced because of defects, so I guess that when subcontractors provide us with defect-free jobs we will get rid of retentions.”

Retentions hark back to an era of mistrust. The government can prove it is a best practice client

Rudi Klein

Klein said cash retentions could be replaced by guarantees provided by an insurance company or a bank. Peter Shaw, partner with law firm Taylor Joynson Garrett, said that such guarantees, known as retention bonds, were easy to arrange for large companies, but doubted that they were appropriate for smaller ones.

Some powerful subcontractor trade associations have already forced employers to accept bonds instead of cash retentions. The British Constructional Steelwork Association, the Federation of Piling Specialist and the National Association of Lift Manufacturers have all introduced bond systems in the past two years.

Defence Estates is one government department that has already made moves to end cash retentions. Under its prime contracting initiative, prime contractors will be asked to provide parent company guarantees.

This system is, however, restricted to firms with large asset bases. That is why, under prime contracting, consultants have formed joint ventures with main contractors. For instance, multidisciplinary consultant Symonds has formed a joint venture with Kvaerner, now calling itself The Prime Contracting Group.