With so much news coverage, it is difficult to ignore the ‘Carillion effect’. It’s hard to see how anything good can have come from Carillion’s collapse, but perhaps one positive effect is its prompt to many businesses to take a look to see if they have their own house in order.
- When are we getting paid next?
- Should we be seeking a guarantee on this project?
- When is our retention due...?
When retention is due might seem a daft question, but an estimated £3bn remains outstanding in the UK construction industry. With roughly 300,000 construction companies within the UK, that is the equivalent of £10,000 worth of debt knocking around per company. For most large contractors, whether or not retention gets released can often be immaterial, and even writing-off sums as bad debt is rarely catastrophic. But, what about the average contractor or those at the bottom of the supply chain for which retention can represent crucial cash - and indeed for those that can afford to suffer lost retention but shouldn’t have to (it is, after all, their money)?
The most common contractual position on retention, and as indeed included in standard JCT contracts, is that half of retention (typically held at 5% or 3%) is due and payable on practical completion, with the release of the remaining 2.5% triggered by the end of the defect liability period and making good defects.
Now, for contractors’ whose house is in order, the day after these milestones pass an application should be made for the release of retention. But what if nothing comes back? Or if one of the typical excuses is trotted out (“we haven’t been paid by our client”, “the company upstream has gone insolvent”, “you don’t get your retention until the main contract works are complete” etc)?
For one reason or another these typical excuses are each likely to be invalid explanations for withholding release of retention. If that is the case, then outstanding retention will be considered an ‘undisputed debt’. With an undisputed debt your ability to recover is greatly increased as it opens up the possibility of insolvency proceedings.
For now, rather than considering options to recover outstanding retention, it is best to consider what you can do to maximise your chances of recovery.
If you are halfway through a project or post-practical completion.
- When will retention be released and have you got those dates noted?
- Does your contract specifically state that you must apply for release of retention, i.e. it won’t automatically be payable until you do?
- How long is the defect liability period and, if relevant, have you been notified of any defects during this period?
If you’re in the process of agreeing the contract.
- What are the retention terms? Are you signing up to unreasonably lengthy release terms?
- Should you be factoring into your contract price the risk that you may not get your retention released (for whatever reason – contractor insolvency, refusal to pay etc)?
- If the contractor you are working for is showing signs of financial difficulty, should the retention be held in a separate holding account?
In the current climate, retention can make a huge difference to cash flow and profitability. In Ruth Sunaway’s article in this edition of Cornerstone, some potential changes within the construction industry and specifically on retention are noted, which may give contractors hope that the days of not getting retention released may be coming to an end. Eyes will be closely fixed on the proposal for a retention deposit scheme (similar to a tenancy deposit scheme), which could give parties peace of mind that their money is their money no matter what may happen to the company upstream. In the meantime, parties should check existing contracts to know what they need to do to get retention released, and when entering new contracts give serious thought as to how they might protect themselves.