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Emma Coates

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Emma Coates

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20 December 2021

Under Construction - Q4 2021 – 4 of 4 Insights

Is now the time for the abolition of cash retentions in the construction industry?

  • Briefing

Lord Aberdare would certainly say so and we expect discussions around cash retentions in the construction industry to reignite in light of his recently proposed bill: The Construction (Retentions Abolition) Bill (Bill). 

How are cash retentions used?

Before we explain the proposed effect of the Bill, it is helpful to recognise the context in which cash retentions are currently used in the construction industry. Most building contracts enable an employer (or contractor in the case of sub-contracts) to withhold a portion of the value of the works carried out until completion or the making good of defects as a retention.

Retentions provide a level of security to the payer for any potential defects or incomplete works and incentivise contractors to return to site during the defects period. But, although common in the construction industry, they are not without their problems. For example, there is a recognised imbalance of fairness against the payee as their part payment is withheld during the construction period without any prior fault or default required. Retentions also restrict cashflow by ringfencing cash throughout a project and for a period post-completion, and retentions can even be lost in the event of an insolvency of a payer further up the supply chain.

Attempts to reform cash retentions

In light of these complications, there have already been various discussions in the construction industry around the future of retentions and there have also been attempts to restrict their use, including the Construction (Retention Deposit Schemes) Bill proposed by Peter Aldous in 2018 (as discussed in Retaining Retentions) and a set of minimum standards for retentions proposed by Build UK (as discussed in Retentions: the road to removal?).

Potential abolition of cash retentions

The most recent movement comes from the Bill which proposes to go as far as to abolish retentions altogether. The Bill proposes to amend The Housing Grants, Construction and Regeneration Act 1996 to the effect that:

  • any provision in a construction contract enabling a payer to withhold retentions entered into after the passing of the Construction (Retentions Abolition) Act 2021 (assuming that the Bill is passed as an act) will be "of no effect"; and 
  • any retentions being held after the coming into force of the Construction (Retentions Abolition) Act 2021 (proposed for 1 January 2025) must be paid in full, no later than 7 working days after the date on which they were due but withheld. 

The Bill has not yet come under the subject of debate in its second reading in the House of Lords and so there is little indication so far about how the Bill has been received in government. But, the Bill will also need the support of the industry to succeed.

The previous Construction (Retention Deposit Schemes) Bill received substantial support from various parties in the construction industry but failed to make progress in parliament and was not carried over into a new parliamentary session. Industry backing is seemingly important to the government when considering the topic of retentions – in the 2017 consultation on retentions (with findings published in February 2020) the government made it clear that its aim is to "work with the construction industry and its clients to achieve a consensus" on the matter. It is likely therefore that the government will be looking for an even stronger industry backing for the Bill given that it proposes a complete abolition of retentions rather than their reform.

Future of cash retentions

Abolishing retentions altogether through the implementation of the Bill would cause extensive change in the construction industry and we anticipate that strong industry backing may be more difficult to achieve than for previous proposals. But, we await to see how the Bill will be received, and, at its least, the Bill will certainly catalyse renewed debate around the topic of retentions and their potential reform. 

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