In our May edition we discussed the government’s proposals to introduce alternatives to cash retentions in an attempt to reduce cash-flow issues across the construction industry. Cash retentions are commonly used in standard form industry contracts and the term refers to the common practice of deducting a percentage of the payments due under a construction contract. Part of the retention (typically 50%) is then returned upon practical completion and the remainder returned within a specified number of months post practical completion, at the end of the defects liability/rectification period or upon the certification of completion of making good. The driving force behind retentions is that they provide security to the employer against the risk that the contractor will not complete the work, or that they will not make good defects during the rectification period. However, in practice, the elongated period for which the money is held can cause cash- flow problems for contractors and the supply chain. Retentions often remain unpaid for upwards of three years after they have fallen due, or partial or complete non-payment is sometimes experienced due to the employers asserting reasons to withhold the monies, or upstream insolvency.
In January 2018, Peter Aldous MP introduced to the House of Commons the Construction (Retention Deposit Schemes) Bill 2017 – 2019. The Bill proposed to amend the Housing Grants Construction and Regeneration Act 1996 so that any clause in a construction contract that enables a payer to withhold retention will not be effective unless all retention monies are held in an approved deposit scheme, in a similar manner to deposit schemes utilised in respect of rental accommodation. As the retention monies will be held within a third-party trust scheme and, therefore ring-fenced, they should be secure and available to be released on time. This should help ensure that the monies are returned to the contractor in a timely manner and, therefore, reducing cash-flow problems and the need for legal action to be taken to obtain repayment.
However, the bill contains no details of how the scheme will run or how monies would be released on the occurrence of events such as insolvency of one of the parties. It is also proposed that the Bill applies to contracts which are “created to have a similar effect to a construction contract”. This is defined more widely than in the Construction Act 1996 which, unless debated and a tighter definition used, could lead to discrepancies with the Construction Act 1996.
The Bill further provides that if the employer fails to pay the retention into a deposit scheme, they must release the retention to the contractor and failure to do so entails the contractor to suspend its performance as if the employer had failed to pay any other “Notified Sum”. Although acting as a deterrent prior to practical completion, once PC is achieved the measure is far less pertinent. A more effective measure might be to adopt a similar multiplier sanction as that provided for in the Housing Act 2014. Under that Act, where a landlord fails to place deposits for rental accommodation in a third party scheme a multiplier of 3 is applied to the tenancy deposit if the tenant is forced to take recovery action. Not only would this be more likely to secure compliance, but given employers’ reputation for withholding retentions (sometimes for disingenuous reasons), it seems appropriate in such circumstances for contractors to be reimbursed for their costs and time accrued pursuing repayment.
Despite these positive initial steps to improve the current situation, the second reading of the Bill has now been postponed five times, most recently in January 2019. Given the outstanding issues discussed above and the prolonged legislative delays, exacerbated by the current political climate, it is likely to be some time before the Bill is enacted into law. However, the fact that £700million has been lost by SMEs in the last three years due to retentions, events such as the collapse of Carillion and the Bill’s backing from 250 MPs and prominent industry bodies means that the issue is unlikely to be overlooked.