The Department for Business, Innovation and Skills has commissioned a full review of the industry practice of holding retentions, possibly leading to new measures limiting their use and offering additional protection in the event of an insolvency.
The review of one of the the industry’s longest-standing dilemmas was commissioned towards the end of last year from consultancy Pye Tait, which is due to produce a draft report with recommendations for BIS ministers next month.
The firm has already held round-table discussion groups and met a number of businesses in the sector, and is this week launching an online survey to gather opinions from a broader range of businesses across the industry.
The review came about following a debate in the House of Lords on the Enterprise Bill. Lord Aberdare – following lobbying from the the Specialist Engineering Contractors Group – initially proposed an amendment to the Bill calling for retentions to be held in trust accounts.
“I am not suggesting that retention should be abolished overnight or removed altogether. I am suggesting that the government could deliver a really good stimulus to the productivity and output of small firms by starting the process of lifting this unfair burden from them now.”
Lord Aberdare
However, after discussions with Baroness Neville-Rolfe, representing BIS in the House of Lords, Lord Aberdare instead moved a different amendment, calling for a full review of the practice.
Describing the problem, Lord Aberdare said: “On average [retentions] amount to about 5% of payments due and about half of this is retained well beyond practical completion of a project, on average for a further 12 months but sometimes for very much longer.
“Some £3bn of cash is estimated to be held back in the form of retentions at any time. This year alone, small businesses have already lost £30m as a result of their debtor companies going into liquidation before paying the sums that they owe but have retained.”
He highlighted previous select committee reports on payment in 2003 and 2008, and the commitment to drop retentions by 2025 under the industry’s forthcoming Supply Chain Payment Charter.
Lord Aberdare added: “The Bill presents a perfect opportunity finally to address this festering issue. I am not suggesting that retention should be abolished overnight or removed altogether. I am suggesting that the government could deliver a really good stimulus to the productivity and output of small firms in the construction sector by starting the process of lifting this unfair burden from them now, with a view to having a better system in place by the end of this Parliament rather than having to wait for 2025 or even longer.”
Pye Tait has been commissioned to produce a report with recommendations and an “evidence base” for ministers to base their decisions on, with the research covering “an evaluation of the current practice of retentions, its costs, benefits and impacts for the sector, and the costs and benefits of alternative practices”.
Rudi Klein, chief executive of the SEC Group, told Construction Manager that new measures enforcing third-party accounts would bring the UK into line with industries in other countries.
“We want to see legislation that means retention money is placed in a separate account, in the same way as happens with tenancy deposits,” he said.
“In Germany, for instance, they are put in an independent stakeholder account and protected.
“In New Zealand, they have just brought in legislation that requires the money to be put into trust. We will persist in seeking legislation that requires retention monies are protected.”
Sarah McMonagle, head of external affairs at the Federation of Master Builders, said that the FMB had been campaigning alongside the SEC Group on the issue, and was pleased that the review was going ahead.
“We’ve never had a government review of retentions, so we’re happy it’s being taken relatively seriously. They certainly don’t have retentions in every country and every industry, and they can be a huge financial drain if the employer company goes bust.
“The Payment Charter has an ambition to get to the point [where signatories] are operating without retentions, but it’s just a statement of intent, so it would be good to have something else with legislative backing. But let’s wait and see what comes out of it.”
It’s understood that the findings of the review could be taken forward by the Construction Leadership Council, where council member Madani Sow – until recently chief executive of Bouygues UK – is leading on the “business models” workstream.
CLC member Simon Rawlinson, also head of strategic research and insight at Arcadis, told Construction Manager: “The Payment Charter is being taken forward. It sits with the Business Model workstream, as a priority activity, alongside the findings of the retention review, under Madani Sow.
“The findings of the BIS study will include short-term recommendations on retention and could lead to a change in current retention practice.”
Responding to Construction Manager’s suggestion that government could “outlaw” retentions, he said: “Outlaw is a strong term, requiring complex steps. But it could be that a wider range of people choose not to use retentions. An organisation could take the view that they will get more benefit from not holding retentions, than by holding retentions.
“So in addition to the Payment Charter, there is work being done on looking at retention as a potential means of getting money into the system.”
Retention sums have been a bone of contention for as long as I have been in this industry, 40+years.
The principle of holding a retention is sound and has proved to be so many times, to correct defective works etc, but it is the abuse of retention sums that is the cause for concern.
I would suggest the following,
1. a cap on total retention sums to 2% of the contract value and half released on practical completion or sectional completion of works.
2. Any company holding retention sums to have an insurance backed guarantee to safeguard these monies.
The firms not releasing the final sums at the end of defects liability period would be subject to interest charges at base + 4% and /or form part of the insurance guarantee. The above could be operated in the form of a bond via the banks, which would be shown in the company accounts and have a direct effect on borrowing criteria.
Continuity of work is a better incentive than retention.
If it is a large contract why not use a retention bond instead?
As a QS I totally agree that non payment of retention monies affects both main contractors and sub-contractors, Clients often view retentions as their money rather than just holding it on trust on behalf of others.
If the Contractor or the Client goes into Administration/Liquidation or Bankruptcy then the subcontractors have little chance of being paid their share of retentions. I agree, and would like to see, the retention fund be backed by Insurance or paid into a separate escrow account that could be accessed and distributed by the Administrator, Liquidator or Trustee in Bankruptcy.
Reform of Retentions in construction contracts in my opinion is long overdue.
It is ridiculous that this subject has dragged on for so long when the solution is actually very simple. Most construction contracts are let under standard or near standard forms, it would therefore be a simple matter for the issuing bodies to amend their terms to the use of Retention Bonds or Bank Guarantees. If you cannot get one then one is not sufficiently well-funded to take the work on (useful knowledge to the Client or Main Contractor). Most of these contracts are supervised by an Architect or Consultant Engineer, it would be simple to have a process whereby they certified any drawdown from the Bond/Guarantee. If the contractor/subcontractor honours their obligations to remedy any defects, there should be no draw down except for contractors/subcontractors that have gone bust. The price of the bond/bank guarantee goes in the price for all bidders and in the case of Bank guarantees, for good standing customers are usually £200 to £500 to set up and a small fraction of a percent per annum on the value of the guarantee
David A Roberts
RCCCL
[email protected]