As set out in Retaining Retentions cash retentions play a significant role in the construction industry. A cash percentage is withheld from each payment made by the employer to the contractor and then by the contractor to its sub-contractor, regardless of whether there are problems in the works. They provide security for possible future defects and are a common feature of construction contracts.
Nevertheless, for contractors and their supply chain, retentions tie up working capital and loss of retention on insolvency events can seriously impact cashflow.
Government initiatives and a private members bill on review of the practice of retentions seem to have stalled, although the Construction Supply Chain Payment Charter set out an ambition to remove retentions by 2025.
Build UK has recently published propConstruction & engineeringosals not just reforming the practice of retentions, but setting out a road map for their abolition. They have produced two documents to support this: a road map to zero retentions and minimum standards on retentions.
The road map sets out how Build UK envisions an end to retentions by adopting key milestones for implementation by the supply chain to deliver zero cash retentions by 2023 – two years ahead of the industry ambition.
These milestones include seeking Government commitment to implement minimum standards and publication of a standard form wording on retention bonds by the end of 2019.
The Minimum Standards aim to reduce the use of retentions, and include the drafting amendments that would be used for JCT D&B 2016 and NEC4 to give effect to the minimum standards.
The key principles set out by Build UK and its members are:
Build UK displays laudable ambition, but achieving zero retentions by 2025 is probably too ambitious given challenges such as Brexit, skills shortages, VAT Domestic Reverse Charge and potential reform of the regulatory landscape over the next few years. If there was an easy solution then that would already have been adopted as common practice.
It is possible that we will see an increased use in retention bonds but these are not common, and whilst they do provide employers protection that protection is not as immediate because it will require the employer to incur cost in trying to recover sums.