Whether you’re an employer or a contractor, it’s likely that you have struggled with the issue of retentions under building contracts.
A percentage of the contract sum withheld from each interim payment, half of which is released at practical completion (PC) and the other half released following expiration of the defects liability period (DLP), a retention is utilised by employers to ensure that a contractor meets its obligations not only to complete the agreed works, but to do so to the required standard, as well as to motivate the contractor to rectify defects during the DLP.
Given the amount of cash held up within the industry as a result of owing or unpaid retentions (estimated to be in the range of £3.2 billion to £5.9 billion over the course of a year) and the knock on impact of this lockup in particular on smaller companies, many have opined that it is time for an alternative method of balancing employers’ need to incentivise contractors with contractors’ need for payment of monies due. Therefore, the Government has launched a consultation on the use of retentions in the construction industry.
Besides the obvious administrative overhead associated with retentions, other key issues highlighted by the consultation include both late and/or non-payment of retentions. Given such experience, it’s not surprising that contractors are loathe to agree retentions. But what are the alternatives?
The options identified within the consultation research included project bank accounts, retention bonds, performance bonds, parent company guarantees, escrow stakeholder accounts and retentions held in trust funds. Further, a new option of a retention deposit scheme is proposed. Thus, the consultation seeks to determine, among other things, whether (a) the current existing alternative mechanisms to retentions are sufficient, and (b) the appetite for a retention deposit scheme.
Given the impact, those affected by the prospect of changes to the retentions regime should submit a response to the consultation.
Interestingly, the retention consultation is being held alongside the general consultation in relation to the 2011 changes to Part 2 of the Housing Grants, Construction and Regeneration Act 1996 (i.e. the “Construction Act”). Key areas questioned within this consultation include the cost of adjudication, the impact of removing the restriction as to who can serve a payment notice and the use by contractors of the right to suspend performance. This consultation also seeks views as to the effectiveness of the Construction Act’s payment and dispute resolution provisions generally.
Clearly it is an exciting time in the construction sector, and the outcome of these two consultations will be closely followed.
Further details of the consultations can be found at:
- Retention Payments in the Construction Industry
- 2011 Changes to Part 2 of the Housing Grants, Construction and Regeneration Act 1996
The timeframe for responses for both consultations is 19 January 2018.
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