The Construction (Retention Deposit Schemes) Bill has received its first reading in the House of Commons and will proceed to a second reading on 27 April 2018. As it is a private members’ Bill the detailed drafting has not yet been published and is expected just before the second reading date.
In the construction industry the deduction of a portion of the contract sum is commonplace. That cash, known as the retention, is withheld from the main contractor by the client and from the sub-contractors by the main contractor to cover the cost (or at least part of the cost) of defects arising during a fixed period (usually one or two years) after the works are completed.
Under standard contractual terms, the main contractor and sub-contractors are obliged to remedy defects arising within that fixed period at their own cost. Contractors and subcontractors will usually comply with that obligation in the expectation that the retention will be released to them at the end of the fixed period.
At any one time over £3 billion of cash retention is outstanding in the UK’s construction industry. In an industry where cashflow is important this can have grave consequences at both a corporate and personal level. The Bill aims to address the situation where there is a delay in release of the retention or where it is not released at all because the party holding the funds becomes insolvent.
The proposal is to amend the Construction Act to require the Secretary of State to introduce regulations to protect retentions by requiring they are kept in a protected or ring-fenced account until such time as they are due for release. The solution would be along the lines of the statutory requirement in section 215 of the Housing Act 2004 under which deposits taken from shorthold tenancies must be placed in a Government-approved scheme. This means the contractor and subcontractors can be assured that the monies will at least be available for release. In theory this should mean that the waiting period for release should be reduced.
Legislation that regulates retention in this way already exists in parts of Europe, Australia, New Zealand and North America.
Closer to home, the Scottish Government has been operating a project bank account regime for government contracts since last year. Payments from the Government to the main contractor are placed in a project bank account and the funds are held in trust by the Government and the main contractor for the benefit of the latter and the sub-contractors. The project bank account operates to ensure that subcontractors get paid on time when the Government has paid the main contractor.
At present retentions under both the main contract and the subcontracts are not held within the project bank account. The reason for this is that retention under the main contract will contain components of subcontractor retention and the Scottish Government (as Trustee of the account) does not want to be held liable for retention repayment if the main contractor is in breach of its obligation to do so.
It has been suggested that the Scottish system could be adapted to include retention. However, if the client decides to have recourse to the whole of the retention fund in the account if the main contractor has become insolvent, the subcontractor is in no better position. Any system would have to protect the subcontractors’ retention from upstream insolvency.
The real detail will be in any regulations issued if the Bill becomes law rather than the Bill itself. But this is a step towards implementing one of the few outstanding recommendations made by Sir Michael Latham in his “Constructing the Team” report.