As set out in Retaining Retentions cash retentions play a significant role in the construction industry. A cash percentage is withheld from each payment made by the employer to the contractor and then by the contractor to its sub-contractor, regardless of whether there are problems in the works. They provide security for possible future defects and are a common feature of construction contracts.
Nevertheless, for contractors and their supply chain, retentions tie up working capital and loss of retention on insolvency events can seriously impact cashflow.
Government initiatives and a private members bill on review of the practice of retentions seem to have stalled, although the Construction Supply Chain Payment Charter set out an ambition to remove retentions by 2025.
Build UK has recently published proposals not just reforming the practice of retentions, but setting out a road map for their abolition. They have produced two documents to support this: a road map to zero retentions and minimum standards on retentions.
What is the road map to zero retentions?
The road map sets out how Build UK envisions an end to retentions by adopting key milestones for implementation by the supply chain to deliver zero cash retentions by 2023 – two years ahead of the industry ambition.
These milestones include seeking Government commitment to implement minimum standards and publication of a standard form wording on retention bonds by the end of 2019.
What are the Minimum Standards on Retentions?
The Minimum Standards aim to reduce the use of retentions, and include the drafting amendments that would be used for JCT D&B 2016 and NEC4 to give effect to the minimum standards.
What are the key principles behind these minimum standards?
The key principles set out by Build UK and its members are:
- No more onerous arrangements at sub-contractor level: arrangements for retentions at sub-contract level should be no more onerous than those implemented under the main contract. This is to ensure fairness and transparency.
- Permanent works only: retentions should only be deducted from payments made in relation to permanent works. The risk of defects in temporary works – such as scaffolding or demolition works – is considered by Build UK to be low enough not to require security by way of retention.
- Threshold for retentions: retentions should not be applied to contracts at any tier of less than £50,000 – increasing to £100,000 from 2021. This is because the risk on contracts of such value is not sufficiently high to justify retention.
- Post completion retentions: retentions should be deducted as a single payment towards the end of the construction period, rather than from payments from the start of construction. This is intended to improve cash flow for contractors and sub-contractors, while still seeking to preserve security for employers, as retention is only taken when it is practically needed.
- Taper: there should be a taper of retention percentages reduced from the current 3% under JCT D&B Contract and NEC, to 1.5% and then to 1% from 2021 until abolition.
- Release not dependant on higher tier contract: Release of retentions at sub-contract level should be independent of the release of retention under the main contract.
Will this be implemented by the industry?
Build UK displays laudable ambition, but achieving zero retentions by 2025 is probably too ambitious given challenges such as Brexit, skills shortages, VAT Domestic Reverse Charge and potential reform of the regulatory landscape over the next few years. If there was an easy solution then that would already have been adopted as common practice.
It is possible that we will see an increased use in retention bonds but these are not common, and whilst they do provide employers protection that protection is not as immediate because it will require the employer to incur cost in trying to recover sums.