In June 2019, British construction industry body, BuildUK, published amendments it would like made to standard construction contracts to support its campaign to achieve zero retentions by 2025.1 This included proposed amendments to the NEC4 Engineering and Construction Contract (ECC) and NEC4 Engineering and Construction Subcontract (ECS).
BuildUK suggests that retentions should not be used in the NEC4 ECC Option F (management contract); in other NEC4 ECC and NEC4 ECS contracts with a starting value of £50,000 or less (increasing to £100,000 from 2021); and in NEC4 ECC and NEC4 ECS contracts for works that are exclusively temporary and/or preliminary in nature. In such contracts, retention option X16 should not be included as a secondary option.
Single lump-sum retention
Where a retention does apply, BuildUK proposes limiting this to 1.5% − and to 1% from 2021 – and that a single lump sum is retained at practical completion rather than being deducted throughout the contract period. Current practice is that retention amounts often start at 5% and are reduced to 2.5% at practical completion, especially on lower-value projects. Retaining a single lump sum towards the end of the construction phase will clearly improve contractor’s cash flows.
Furthermore, BuildUK says the existing concept of 50% of the retention being released to the contractor following completion of the works should be removed and instead the full retention should be released once the defects certificate has been issued. As such, from practical completion the current market position regarding retention would apply, the difference being that the amount held would be lower than is currently the case.
BuildUK suggests including a mechanism entitling the client to retain additional amounts if it is anticipated that the single lump-sum payment will be insufficient to cover the amount to be retained. In practice this right will need to be exercised carefully by the client, with clear justifications for retaining additional amounts to avoid any potential disputes arising with the contractor.
Transparency on subcontracts
It is also proposed that all NEC4 ECS subcontract documents submitted by the contractor to the project manager for acceptance should include details of any payment terms and retention provisions, excluding any pricing information. While this will encourage transparency throughout the supply chain, the contractor will need to ensure that its subcontractors agree to such commercial and financial information being shared with the client, ideally before signing up to NEC terms with the client.
Where retention is to be withheld under any NEC4 ECS subcontracts, BuildUK proposes that the retention provisions should be no more onerous than those implemented at NEC4 ECC main contract level. The threshold of £50,000 and the restriction relating to temporary and/or preliminary works should equally apply. Any failure by the contractor to ensure that the subcontract documents comply with the retention provisions under ECC will entitle the project manager to reject the subcontract documents.
Advice for clients
As with any amendments to standard form contracts, NEC clients considering adopting BuildUK’s proposed amendments should only do so with great care. They should tailor them on a case-by-case basis depending on the nature and value of the works, the bargaining strengths of the parties and the arrangements and relationships already in place with the supply chain.
The downside with the proposed amendments is that they seek to dictate how the parties are to contract with one another and their supply chains. For example, it may be difficult for contractors to agree such retention provisions at a subcontract level, especially where they already have an agreed way of working with their supply chains. It would seem counterproductive to upset a relationship if it is already working well for both parties.
Retentions undoubtedly have cash flow implications for contractors. However, clients are generally reluctant to lose their pot of ready money. Retentions provides a fund for rectifying defects and incentivises contractors to remain on site to rectify all defects. They also offer clients some protection against contractor insolvency.
If retentions are not used, then clients will need to be satisfied that either security is not required, for example due to the low risk associated with the nature of the works, or that alternative security arrangements will be put in place, such as a retention bond.
This article was first published in the NEC User Group's Newsletter in November 2019.