Cash is king in construction, and inadequate cash flow is one of the major reasons that construction companies fail. Retentions (whereby the employer withholds a percentage of payment until the construction work is completed free of defects) have a significant impact upon cash flow throughout the supply chain.
In 2017/18, the government consulted on whether further intervention is required in respect of the issue of retentions. Build UK responded by calling for the abolition of cash retention from the construction industry by no later than 2025. Since then, Build UK has published two documents in support of this ambition:
1. Roadmap to Zero Retentions
The roadmap sets out key milestones to deliver zero cash retentions between now and 2023 (ambitiously two years ahead of the target date). Notable key milestones include: (i) the publication by Build UK of a standard form of retention bond; and (ii) the provision of support for implementing other forms of security, by the end of 2019.
2. Minimum Standards on Retentions
Members of Build UK have agreed a number of minimum standards on retentions. The guide sets out the drafting amendments that are required to the JCT D&B 2016 Contract and Sub-Contract, and the NEC4 ECC and Sub-Contract to give effect to the minimum standards. Key principles include:
- retentions at sub-contract level should be no more onerous than those implemented under the main contract, to ensure that retention arrangements are passed down the supply chain fairly;
- a retention should only be deducted from payments made in respect of permanent works. The risk of defects in temporary/preliminary works such as scaffolding/demolition works is considered low enough not to require security by way of retention;
- retention should not apply to contracts with a value of less than £50,000 (increasing to £100,000 from 2021), on the basis that retention should be used as security against "meaningful losses";
- retention should be deducted as a single sum towards the end of the construction period rather than from interim payments from the start of construction, to improve cash flow for contractors and sub-contractors;
- retention percentages should be reduced to 1.5% (reducing further to 1% from 2021), from the current standard position of 3% under both the JCT D&B and the NEC4 ECC contracts; and
- the release of retention at sub-contract level should not be dependent on the release of retention under the main contract, as per the Construction Act.
If the construction industry moves to zero cash retentions by 2025, then care will need to be taken to ensure that a balance is struck between improving cash flow for contractors and sub-contractors on the one hand, whilst preserving security for clients that, for example, outstanding or defective works will be completed.