Zero retentions in construction projects?

There are estimated to be £7.8 billion of cash retentions unpaid across the construction sector in the last three years (Pye Tait’s review published in October 2017), but work has been ongoing to protect contractors’ interests.

In the June edition of the spotlight on development newsletter, we commented on Build UK’s Contract Terms Recommendation. As part of the effort to reform the retention system, Build UK has also published a set of Minimum Standards on Retentions, working towards abolishing retentions in the construction industry.

Build UK’s principal proposals are that:

1. Any arrangement for retention in any sub-contract should be no more onerous than similar arrangements in the main contract. This should be probably the easiest of the proposed reforms to implement. Many contractors assess sub-contractor retentions on this basis already, but the practice is not uniform, and a consistent policy would be welcomed by sub-contractors.
   
   
2. Retention should only be deducted from payments made in respect of permanent works. Build UK suggest that the risk of defects in temporary or preliminary works (such as scaffolding or demolition) is low enough that security is not required.
   
   
3. Retention should not be applied at all to contracts at any tier with a starting value of less than £50,000 (increasing to £100,000 from 2021). Build UK considers that the risk on contracts below these values is not high enough to justify a retention, a view which seems sensible.
   
   
4. Where retention is withheld, it should be deducted as a single sum towards the end of the construction period rather than from interim payments throughout the construction period. Build UK suggest that this reform would improve contractors’ cash flow whilst preserving security for employers by taking retention only “when practically needed”; however, we wonder whether retention monies withheld monthly might be beneficial for the cash flows of many companies, rather than the sudden jolt of a lump sum, however expected it might be. 
   
   
5. Retention percentages should be reduced to 1.5 per cent (reducing further to one per cent in 2021) from the current standard position of three per cent under many standard form building contracts. Build UK comment that the current levels of retention are not sustainable, particularly for lower tier contractors. Given the levels of contractor insolvency, this view would seem beyond argument.

Build UK’s proposals reflect real concerns as to the use (and mis-use) of retentions, but we suspect that they will not be adopted quickly or easily across the industry.

If you require further information about anything covered in this briefing note, please contact Hannah Sissons, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2019