Retentions in the Construction industry – A concept to be retained?

Retentions have commonly been used in construction projects for a number of years now to provide protection and an element of control to the employer over various aspects of the project, including the rectification of defects.

Employers frequently hold back an amount (usually 5%) from payments to the contractor, and this is used as leverage to ensure the contractor returns during the defect rectification period to resolve issues, or it can be used to set-off certain costs to the employer.

In recent years however, questions have arisen within the industry as to their appropriateness amidst growing concerns that the entire concept is being abused by employers.

All too often, contractors find that employers arguably “manufacture” reasons to withhold some or all of the retention monies, or simply become uncontactable after the project has completed (the latter being far more likely on much smaller projects).

Another major problem with retentions relates to insolvency. If the employer goes insolvent before returning the retention, the contractor will face an uphill battle to get their money back.

Whilst the amount of the retention might be of significance to the contractor, it is often too small an amount to justify the costs involved in trying to recover it.

These issues led to increasing pressure on the government to reform the law in this area, which came to a head with the well documented collapse of Carillion. This prompted calls by various bodies (including Build UK, the Civil Engineering Contractors Association and the Construction Products Association) for the government to scrap retentions in entirely by no later than 2025.

The government responded by proposing new legislation to deal with these issues on 9 January 2018, known as the Construction (Retention Deposit Schemes) Bill. Whilst the new law would not scrap retentions entirely, it does introduce a scheme whereby all retention monies would need to be held in an approved deposit scheme. Whilst the practical details are yet to be made clear, many envisage it working in a similar manner to deposit schemes on rental accommodation.

Importantly, it is proposed that the legislation would apply retrospectively, meaning once (or perhaps if) the law comes into effect, any money already being held as a retention would need to be moved across to one such scheme within a set period or the retention will need to be returned to the contractor.

This proposal, whilst not going as far as a complete ban on retentions, can be seen as a step in the right direction to ensure that both parties have an element of protection when it comes to retentions through the introduction of an independent third party.

Regrettably however the next step in the legislative process (which would be a further debate on the proposal by MPs) was originally due to take place back in June of this year, however this has now been pushed back on several occasions. It would seem that government considers that it presently has more pressing matters at hand…

As a result, we are currently left somewhat in the dark as to whether the new law will come into effect, and if it does, when that will be or how it would work in practice.

So with the construction industry’s calls for reform remaining unanswered, we are left waiting with bated breath to see when and how this issue will ultimately be resolved. It continues to very much be a matter of “watch this space”.

If you have had or are currently experiencing issues with retentions or would like advice on their application or implications, please contact one of our experts in this industry using the details provided below.

Alternatively, if you would like an update on the progress of this proposed new law, we would also be glad to assist.

Please contact our construction team.

Cesare McArdle
Partner, Commercial & Construction
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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