Cash retentions in Construction – Scottish Government Consultation Open
Two years since Peter Aldous MP brought his private members bill to Westminster, some 26 years since the recommendations in the Latham report and still no solution to the topic of cash retentions in the construction industry.
According to statistics quoted in Parliament in January 2018 around £220 million is lost within the construction industry in the UK year on year as a result of a failure to pay cash retentions on time, or sometimes at all. This is a practice which has significant implications whereby under the terms of standard contracts cash, properly due to a contractor or sub-contractor, can be retained by the paying party for periods in excess of 12 months ostensibly as security for snagging or until completion of making good defects. In an industry where cash is king, the flow from one party to a construction contract to another is essential, allowing not only for a thriving construction industry but allowing for investment in people, facilities and equipment, innovation and the like.
The real issue with cash retentions in construction contracts come to the fore where the paying party refuses or delays to release monies due at the expiry of the relevant contractually agreed period even before consideration of circumstances of upstream insolvency. Where retentions are held by main contractors or employers which subsequently suffer an insolvency event, this can and often does have the effect of those sums being lost to those to whom it is properly due.
Curiously there has historically been a fundamental misunderstanding of the nature of the retention provisions in any construction contract. The purpose of retention is to retain a percentage of sums due to the payee, as a form of security to account for any snagging works post completion. The sums are and remain due to the payee. On the expiry of a specific period (often 12 months) subject to the payee properly making good any snagging issues and defects the retention ought to be paid out to the payee. It is never the property of the payer after certification of the works as practically complete but merely a security of sorts to facilitate the completion or making good of defects and always subject to the contractual arrangements between the parties.
Following the demise of a major contractor, in early 2018, Peter Aldous MP proposed a Construction (Retention Deposits Scheme) Bill (following a proposed amendment to the Small Business, Enterprise and Employment Bill presented by Debbie Abrahams MP in 2014) to the effect that that cash retentions would have required to be ring fenced and held in a retention deposit scheme. This was for the purpose of safeguarding the sums retained and facilitating resolution of any disputes arising.
Despite cross-party support, the Aldous Bill failed to complete its passage through Parliament before the end of the Session and as a result will make no further progress.
So where does that leave the industry?
In December 2019 the Scottish Government commenced a Consultation on the practice of cash retention under construction contracts. Around £124 million is estimated to be retained at any given time within Scotland alone. The Pye Tait report on Retentions in the Scottish Construction Industry commissioned by the Scottish Government states that: “there is no doubt that the system of retentions is often abused and that the system can create significant problems for smaller businesses should there be insolvency further up the chain. Because retention money is almost entirely kept in the organisation’s main bank accounts, the funds are extremely vulnerable should the organisation become insolvent – with often serious impacts on the supply chain.”
The Consultation aims to gather views and information on:
- The effectiveness of existing prompt and fair payment measures for retentions;
- Views on the Pye Tait independent research on retentions in the construction industry;
- Late and non-payment of retentions;
- The effectiveness of existing alternative mechanisms to retentions; and
- The benefit of holding retentions in a retention deposit scheme or trust account.
Building Engineering Services Association (BESA) has already urged its members to take part in the consultation and supports a retention deposit scheme, similar to that envisaged by the Aldous Bill.
The Welsh Assembly undertook an inquiry into the same topic in October 2019.
With Scotland and Wales both taking steps to investigate and support appropriate reform in this area, and with broad multi-party support for the now defunct Aldous Bill at Westminster, cash retentions remains a hot topic. Let’s hope it’s not another two years before we see any further developments.
The consultation is open until 25 March 2020.