The end of retentions?

Don’t hold your breath!

Laurance Sheppard, Senior Associate, Thomas Eggar (recently merged with Irwin Mitchell LLP), gives his opinion on the abolition of retentions.

In April 2014 the Government launched its Construction Supply Chain Payment Charter. A central plank of the Charter was the abolition of retentions by 2025. Now the Government has announced that it will start a review of the practice of retentions. The review will deal with current practice and its impact on all parties involved, before suggesting alternatives to the practice of retentions.

Everyone in the construction industry, whether they be clients, main contractors or subcontractors, are acutely aware of retentions and the need for them (or some alternative) but they are very divisive and cause many conflicts in the industry.

Take, as an example, an amended JCT 2011 Design and Build Contract. Retentions are (predominantly) dealt with by clause 4.16 and 4.18. The retention percentage is 3% unless (which is usual) the contract is amended to say 5%.

Pursuant to clause 4.16 (and I paraphrase) the retention that is deducted from each interim payment under clause 4.7.2.1 is to be held by the employer as a fiduciary trustee. If the main contractor so requests, then the retention money must be placed into a separate bank account and held by the employer on trust.

If all runs smoothly then half the retention is released back to the contractor on practical completion and the other half is released back on the making good of defects. For me here is the nub of the issue. I have never, in over 20 years of working in the construction industry, seen these clauses (and their predecessors) un-amended.

The simple reason for this is that the employer wants to use the retention to help their own cash flow and to feel they have some stick with which to beat the contractor. So the employer holds retention and then in turn the main contractor holds retention against his sub-contractors.

Debate has raged for years about the pros and cons of retention. Employers like it as it will force the main contractor to come back and finish any outstanding or defective work. On the other hand, the main contractor sees a retention as unfairly withholding money for the work they have carried out and this money could be used to aid their cash flow.

Further, in the event of a main contractor insolvency (and let’s be honest) the employer gets a windfall and generally keeps the retention. The knock on effect of a main contractor insolvency tends to be massive, leaving a trail of destruction with many sub-contractors “high and dry” when it comes to getting their own retentions back.

The consultancy firm appointed by the Government to come up with alternatives to retentions have their “hands full”. It will be incredibly difficult to find a universally acceptable solution. Retention provisions are embedded in the construction industry, they are familiar to all (and begrudgingly accepted?) and they are a contractual provision in ever major contract.

I have mentioned trust accounts above (from the un-amended JCT contract) – I have never seen one. There is the possibility of the main contractor and subcontractor providing a retention bond. These should be an on demand bond to the value of the retention held. The retention is then released back to the contractor. The beneficiary can call on the bond should the contractor not complete his work, or if he does not come back to rectify defects.

A solution? Perhaps, but having worked for a main contractor for years we would always offer a retention bond to an employer so we would get our retention back to help our cash flow. However, we never allowed a subcontractor to provide a retention bond because we used the subcontractor’s retention to aid our own cash flow.

For me retentions will always remain in some form or other in the industry, but perhaps we should revert to an un-amended form of main contract and sub-contract. Then at least contractors would know their money is safe, even though they cannot access it.

The post The end of retentions? appeared first on UK Construction Online.