Cornerstone – Construction retention reform: don’t hold your breath

The Government launched a consultation in October 2017 seeking industry views on retention. Most in construction are well-aware of the problems caused by retention – tying up cash flow for the supply chain (sometimes forever where the blight of insolvency strikes), and often adding administrative and legal costs to recover legacy debts.

Indeed, in the foreword to the consultation, the Government recognised that retentions can be a barrier to investment, productivity improvements and growth.

Despite the issue attracting added attention around the time the consultation closed at the start of 2018 as a result of Carillion’s collapse, and despite the problems compounded by many more big name casualties in the months that followed, the Government seemed in no hurry to deal with the issue. Only yesterday (26 February 2020), more than two years after the consultation closed, did the Government publish a response and that response is non-committal at best:

“The responses and wider stakeholder engagement that took place during the consultation period illustrate the breadth of views within the sector on the practice of cash retentions, given the nature and complexity of the construction supply chain and the range of possible policy solutions. We will continue to work with the construction industry and its clients to achieve a consensus on how to resolve the problems associated with cash retentions.”

In other words, the Government recognises the problem, but has offered no timescale for reform or details of what that might look like. It does say that: “Several policy options are under consideration, a possible retention deposit scheme, and phasing out of retentions completely” with work continuing to assess the viability and potential impact of these, but did not say what work will now take place and when we might see results.

The consultation response does at least summarise what the industry said. A decent number of respondents put forward views (including us, and a good number of our friends), which included:

• the value of retention in the construction sector in a given year was between £3.2bn and £5.9bn
• more than 80% of respondents thought that existing measures governing retention were ineffective
• a general theme of distrust was apparent – with late release or spurious arguments raised to hold on to retentions, a lack of protection against insolvency, and a feeling that retentions had a greater impact on cash flow the further down the supply chain you went (particularly given relative bargaining power)
• almost all respondents indicated that non-payment of retention due to insolvency, or late or non-payment for other reasons, was a significant or very significant problem
• some indicated that a lack of clarity about payment provisions or the trigger for release (e.g. practical completion under another contract, issue of making good certificates) made recovery of retention unnecessarily difficult. Continued use of conditional payment provisions despite the 2011 changes to the Construction Act was noted by some as a problem, either due to ignorance or bad practice.

The consultation reveals no real consensus on a way forward. The idea of a cap on retention was supported by some, in particular on the duration for which it can be held. Alternatives like project bank accounts and bonds were again supported by some, but it was noted that these are often used as well as retention.

Most supported the idea of a retention deposit scheme (RDS), that would work in a similar way to the tenancy deposit scheme which operates for residential lettings. Around 80% of respondents thought that should have statutory footing – in other words, to be a mandatory scheme probably introduced as an amendment to the Construction Act. But views on the way in which an RDS would operate including what projects it would affect, the values of retentions held, and what the consequences of non-compliance varied, perhaps indicating the difficulty of the task facing government in addressing the issue.

Nevertheless, the mood does seem to be towards reform. A private member’s bill – the so-called Aldous Bill – aimed at bringing in an RDS has already been raised in Parliament twice, and although it has twice failed (as most such bills do, and hampered by Brexit shenanigans), is reported to have cross-party support. The Government has said it is looking at that matter and while the speed with which the consultation moved was a disappointment, with that now published and with the Government perhaps more focussed on this issue, hopefully we will not have to wait two years for the next update.

In the meantime, companies can protect themselves. Negotiating sensible retention terms at the start (including negotiating it out where appropriate) puts parties on a good footing. And then keeping track of release dates and knowing the mechanism for securing payment down the line can help manage the risk of having to wait months or years for the last chunk of payment – which often represents the profit element of a job.

This article is from the March 2020 issue of Cornerstone, our monthly newsletter for those working in the construction industry. To download the latest issue, please visit the newsletter section of our website. For further information please contact a member of Birketts’ Construction Team.