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legal alert: Retentions – will the winds of change blow through the construction industry?

04 Apr 2018

Sarah Wilson, partner at commercial law firm Watson Burton, throws the spotlight on the Construction (Retention Deposit Schemes) Bill 2018 – and the impact it could make for contractors and subcontractors.

It is estimated that more than £3.2 billion is held in retentions in the UK construction industry, according to Retentions in the Construction Industry, a report conducted by Pye Tait last year on behalf of the Department for Business, Energy and Industrial Strategy.

This is a staggering figure – and the issue of developers failing to release retentions has been brought to more widespread attention by the collapse of Carillion.

Retention – a practice introduced to provide security against defective work or the insolvency of construction firms – is a common feature in construction contracts. During the construction phase, developers will give themselves a level of protection against defects and late completion by deducting and retaining a percentage (often around five per cent) of the value of the works from payments due to the contractor. The same method can be employed when contractors are working with subcontractors on a project.

Retention has been a feature of the industry for more than 100 years and has been operated with good intentions, encouraging efficiency and productivity, and pushing contractors towards eliminating defects.
However, contractors and subcontractors often face difficulty in recovering the retention, with serious financial implications.

But the call for reform has been heeded and in January, Peter Aldous MP presented the Construction (Retention Deposit Schemes) Bill 2018 in the House of Commons under the 10 Minute Rule Motion. A Private Member’s Bill, its aim is “to make provision about protecting retention deposits in connection with construction contracts; and for connected purposes”. It is intended to bring about the introduction of legislation that will require cash retentions to be paid into a Government-approved scheme, effectively ‘ring fencing’ them from the other assets of the party holding the retention.

Should a developer or contractor become insolvent, the cash retention would be protected and would therefore become available to contractors (and/or subcontractors) before distribution to creditors takes place. In many cases, this could limit the damage done by a major collapse in the construction industry and potentially help to protect jobs through the supply chain.

If successful, the legislation will be brought in as an amendment to the Construction Act and will apply to all contracts within the Act (which excludes contracts involving householders).

The failure to deposit retention monies in a Government-approved scheme will render invalid any contract clause enabling the withholding of cash retentions. Disputes regarding the release of the monies can be referred to adjudication.

The Bill is expected to have its second reading in the House of Commons on April 27, 2018 and if it progresses, could represent a major change in the construction sector, with significant benefits for subcontractors. Obviously the benefits for contractors are more limited where they would benefit up the contract chain from the proposed change but lose the benefit of subcontractor retentions.
So if you work in the construction industry and wish to influence the Private Members Bill, you have a number of options.

First, you can contact your MP, who may have the opportunity to speak and vote on the Bill during its stages in the House of Commons - let them know your feelings about the Bill and ask to meet them so that you can put your case forward.

Second, after a second reading takes place in the House of Commons, it will usually be referred to a Public Bill Committee for detailed examination: the committee may invite lobby groups, organisations and individual members of the public to give their views.

If you feel that you (or the organisation you represent) should be invited you can contact the departmental officials responsible for the bill. Public Bill Committees may also ask for written evidence.

If the Bill is passed, major changes are set to sweep through the construction sector. However, until that time, contractors and sub-contractors should look to legal support to help them tackle issues around retentions. Watson Burton’s construction team have vast experience in the construction sector and can advise clients on risk analysis, problem solving and dispute resolution. Our firm has particular experience in adjudication and mediation.
Working in the construction sector and need advice on retentions or other issues? Call Sarah Wilson, a partner who specialises in construction law, on 0345 9010930 or email sarah.wilson@watsonburton.com.

 

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Contacts


Sarah Wilson | Partner

Email:
sarah.wilson@watsonburton.com
Tel:
0345 9010930