The fact you have taken the time to read this suggests you probably already know what retentions are and why they create issues for the construction industry. But what next for retentions and what solutions are out there?
Some of the first retentions as we know them now, were developed in the 19th Century. As with so many contractual arrangements we are familiar with, the industrial revolution was their source. During the huge engineering projects which led to railway lines crossing the country, retentions of as much as 60% of the contract value are said to have been held. They were to provide security against shoddy workmanship which was rife. It was interesting to see Network Rail recently announcing a ban on retention payments – a case of first in – first out?
Returning to the 21st Century: the issue of retention payments has been in the industry press now for some time. It has been discussed in Parliament as far back as 2003 and again in 2014. With the support of many industry bodies, the ‘Aldous bill’ brought forward by Peter Aldous MP made some progress. However, as a result of the political stagnation we’ve experienced for the past few years, the bill has now run out of time.
What’s the problem?
Some would say we need the mechanism to ensure a safety net for defects. And they might be right, but in reality, a 5% retention now rarely actually pays for defects. And in a recent study, the government estimated around £1m is lost by the industry each day in retentions. Around £7.8bn has gone unpaid in the past three years.
Perhaps the starkest reminder of the effect of retentions was the Carillion collapse. Many subcontractors found that monies owing to them vanished along with the insolvent company.
There is arguably some irony in insolvency now causing problems with non-payment of retentions. Given that they were designed to deal with the problems caused by insolvency.
A significant concern is the effect these costs have on project outturn costs. Inevitably, lost money has to be clawed back somehow, and the cost and time of dealing with retentions is likely to have a knock-on effect on project delivery.
Another problem is a lack of consistency. Even on government / state projects, different sectors have different policies. I’ve already mentioned Network Rail, but anecdotally, the Education sector tends to rely on retentions heavily. In contrast, the highways agency use project bank accounts to manage money. Amounts retained tend to average around 4.8%, but can vary depending on the employer.
Other challenges to overcome include contract forms which often include options for retentions as standard. Furthermore, there is a lack of a client-focused industry body. There is no significant single point of contact for client organisations in the way that there is for other contracting and design-based firms. Whilst there is the British Property Federation, their role is different from that of other institutions in our industry.
What are the solutions?
A few options have been proposed:
One option is a retention bond – whereby money is paid into a third-party bond and then money released subsequent to certification of practical completion.
Another option with similar result would be the use of a trust to hold money. This would be similar to the current arrangement for private landlords and tenant deposits. As I understand it this was the option preferred by the private members bill of Peter Aldous.
Other options include prompt payment schemes, charters and rules around payment periods. Whilst most of these are positive steps in the right direction, most have only limited impact on the activities of large businesses.
The multi-million-dollar question:
The dissolution of parliament means that even though it was looking unlikely the Aldous bill would go through, it has now fallen away. However, whilst the bill has been shelved the Building Engineering Services Association (BESA) who were behind the original bill, are still campaigning for the government to do more.
But would the Aldous bill solve the issues at hand or create different problems? Retentions are used to manage cash flow by many contractors. The removal of retentions would no doubt reduce the cash available to contractors. With that in mind, I wonder whether a system such as that proposed by the Aldous bill would lead to contractors clawing back the funds from elsewhere?