Retention has had its day…

Unjustified late and non-payment of a retention is unacceptable BEIS Report October 2017

Or perhaps that is wishful thinking? Build UK is implementing the Construction Supply Chain Payment Charter to move to zero retentions by 2025 (although some more enlightened employers like Network Rail have already introduced this).

Each year roughly £4.5bn is held in retentions and nearly 25,000 companies are not paid retention valued at £230m due to insolvencies.*

The issues relating to retention include:

Retention is not universal – 35% of construction contracts (and virtually all engineering contracts) do not rely on it to mitigate the risk of defects.

Alternatives

There are some options which partly avoid retentions:

  1. Deposit schemes (as proposed by the Aldous Bill) which are similar to trust accounts.
  2. Trust accounts (either project bank or escrow account) into which the retention is paid – this acts as a safeguard against insolvency but does not improve cashflow, nor ambiguity over when the fund can be used; monies are only paid in by the funder once certified and paid out in proportions determined by the contract administrator and the main contractor. This the best multi-lateral solution as it can cover the whole project team.
  3. Retention bond – instead of withholding retention, the contractor arranges for a retention bond for the same amount; as this bond would be on-demand and provided by the contractor’s bank, it will have an impact on the contractor’s working capital. This has no effect with tier 2 subcontractors.
  4. Performance bond – to safeguard performance of the contract, the contractor can provide a conditional performance bond for a premium; the surety has many defences to this type of instrument but it is common on UK construction projects, as well as retention (not instead of).
  5. Final stage payment – instead of withholding 5% until completion and 2.5% during the defects period, one alternative is to have a final 2.5% stage payment at the end of the defects period. This money is only payable if defects are completed. It does not provide security to the employer during the works however. This is the proposed solution in the new FMB Suite.

For more information on alternative, see this RICS article and for information on legislative proposals in the UK and wider afield read this Eversheds-Sutherland article.

What should you do?

Instead of repeating bad practices, identify and evaluate the risks that retention is currently intended to respond to (or safeguard against) and identify other means of managing those risks.

Source: Retention payments in the construction industry, BEIS impact assessment (Sept 2017, data based on 2015 figures).

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