What are the alternatives to retention?
Its two key purposes are:
- security against defective work or
- security against insolvency within the supply network.
Whilst there are plenty of alternatives to retention covering both these purposes, we seem to be strangely wedded to this anachronism in UK construction. Even the CLC/NEC November 2022 Guidance on Retention recognises that its use runs counter to procurement best practice.
In 2017, when I revised the FMB Suite of Contracts, their builder members – somewhat counter-intuitively in my opinion – asked us to add retention back into their contracts (!). Shocked, I proposed the approach taken by many engineering contracts: an optional final stage payment, paid at the end of the defects period.
(This is similar to the recommendation in the new CLC/NEC Guidance of a ‘single retention to be taken at completion’.)
Retention is optional
Retention is not a requirement.
It’s not used in the IMechE/IET model forms or the IChemE standard forms. It has to be positively opted into under NEC. Even for JCT contracts, the percentage can be set at zero.
Network Rail banned retentions for its tier 1 contractors in 2018. CLC and BuildUK support the move to zero retentions by 2025. But there is still billions of pounds of retentions held across the sector, and a high proportion of contractors who struggle to get it paid in full.
Retention may be needed (according to the CLC/NEC Guidance Note) where the client does not believe it will manage quality during the construction stage or has no confidence that the contractor will correct any defects. Surely both these issues are better dealt with before a contract is signed, than relying on retention to resolve?
What should you do?
As a contractor or subcontract: require any unavoidable retentions to be below your profit margin percentage, held securely, and paid swiftly. Propose an alternative price for a contract with zero retention.
As a client: objectively determine whether the benefit of retention outweighs the increased cost. Consider alternative means of securing these obligations.