Reform of Retention

The use of retentions in the construction industry was thrust into the spotlight at the beginning of this year with the introduction of the Construction (Retention Deposit Schemes) Bill 2017-19 by former chartered surveyor Peter Aldous MP under the Ten Minute Rule. The Bill followed an earlier consultation.

The term ‘retention’ refers to the common practice of deducting a percentage (typically 3%-5%) of the payments certified as due under a construction contract. Half of the amount deducted is typically released to the contractor upon practical completion, with the remaining half released upon certification of making good defects at the end of the rectification period (usually 12 months after practical completion).  In theory, retentions provide security to the employer against the risk that the contractor will not complete the works.

The practice of deducting retentions has long been criticised by contractors and sub-contractors. Common complaints are that retentions are released late, offset against spurious defect claims or lost to upstream insolvencies in the supply chain.

Often those most likely to suffer from non-payment of retentions are the SME’s further down the supply chain.  The scale of the problem was highlighted by the collapse of Carillion, which was estimated to have held £800 million in retentions at the time it went into liquidation.

The Construction (Retention Deposit Schemes) Bill is aimed at protecting retention deposits withheld under construction contracts through the introduction of amendments to the Housing Grants Construction and Regeneration Act 1996 (the “Construction Act”).

The amendments to section 111 of the Construction Act would mean that any clause in a construction contract that enabled a payer to withhold retention will be of no effect unless:

• the retention is paid into a special deposit scheme;
• the payer notifies the payee of the scheme administrator’s details; and
• the payer notifies the scheme administrator of the payee’s details.

Where retention monies are already being held under a contract that pre-dates the new Act, those monies must be transferred into a retention deposit scheme. Where a payer fails to comply with these obligations, it will obliged to refund the retention in full within seven working days.

At the time of writing, the Construction (Retention Deposit Schemes) Bill is due to receive its second reading on 25 January 2019. The Bill has received strong backing from some sections of the industry. Others claim the Bill does not go far enough and suggest that retentions should be outlawed altogether. Meanwhile, employers may be wary of additional costs and any attempt to fetter their access to the most common form of security in construction projects.

This article was written by Chi Mount. For more information, please get in touch with Chi via chi.mount@crsblaw.com or +44 (0)1483 252 598.