Kirsti Olson: ‘Retentions’ holding constructors back

Westminster has repeatedly failed to tackle the controversial use of ‘retentions’ to delay payments in the construction industry. Now Holyrood is taking the issue on, and it might finally bring the rest of the country into line with other jurisdictions, which currently do more to protect smaller contractors.

Kirsti Olson is a construction dispute resolution partner at Dentons.

The Scottish Government consultation on the use of retentions in the construction industry, due this year, is part of its initiative to step up engagement with the construction sector and grow “a more sustainable, productive and innovative industry”.

Retentions are common in UK construction projects. An agreed percentage of every payment that becomes due to a contractor for its work is withheld. The money accumulates throughout the project. Usually, half of the retention is released on completion and the balance around 12 months later, when defects have been made good.

The purpose of retention is to give the employer security: it encourages the contractor to come back after completion and fix defects and protects the employer against the contractor’s insolvency. If the contractor is unwilling or unable to rectify defects later, the employer can use the fund to pay for work that needs to be done.

IR20150414. 14/04/15. TSPL shift, New Bridge over the Firth of Forth. The new Queensferry Crossing under construction, view looking north from South Queensferry. Picture Ian Rutherford ©Ian Rutherford [email protected] www.ianrutherfordphotography.com 07710337520

Concerns have been expressed about the abuse and misuse of retentions, which can have a huge impact on smaller construction firms in particular, but despite numerous attempts by the UK government to look at this issue, no action has materialised.

Retentions mean payment for work done is delayed, sometimes substantially. Sub-contractors working on larger projects might have to wait until the main contract (or a subsequent phase of work) is completed for the retention to be released. Sub-contractors often seriously lack visibility on when retentions will be paid.

This delay in payment can cause hardship, particularly for smaller sub-contractors down the contractual chain, who have to wait longer to be paid. Retentions restrict cashflow and reduce the ability of contractors to invest in their business. Chasing for payment diverts valuable resources, and late payment can contribute to a business becoming insolvent. The smaller the business, the harder it is likely to be hit.

The risk of upstream insolvency is of even greater concern. There is no current requirement for a retention fund to be protected in any way – it is held in the bank account of the holder until paid. If the holder of the fund becomes insolvent, the fund becomes part of the general pot of money available to creditors. It has been reported around 44 per cent of contractors have suffered non-payment due to upstream insolvency in the last three years. Large main contractor failures, such as the 2018 collapse of Carillion, can have a dramatic effect on businesses left out of pocket, with a knock-on effect on the ability of the UK’s construction industry to operate as a whole.

There have been past attempts to address this issue at a UK-wide level. One of the key recommendations in Sir Michael Latham’s 1994 report Constructing the Team was for government legislation to be introduced to protect retentions. The report’s other payment recommendations became law in the 1998 Construction Act, but his recommendation on retentions did not.

Towards the end of 2017, the Department for Business, Energy & Industrial Strategy launched a consultation on retention payments in the construction industry. It closed in January 2018 but no recommendations have been published.

In January 2018, Conservative MP Peter Aldous introduced a Private Members Bill, called The Construction (Retention Deposit Schemes) Bill 2017-19, into the House of Commons. The purpose of the Bill is to protect retentions by placing them in a retention deposit scheme. Failing that, the money will have to be paid out in full within seven days. However, the second reading of the Bill has been delayed on numerous occasions, no doubt overshadowed by the Brexit process.

The UK is now seriously out of step with other jurisdictions, which have legislated to ring-fence cash retentions or allowed contractors to provide alternative means of security. So, the Scottish Government’s intention to consult separately on this issue is to be welcomed and it might be more fleet of foot in implementing a solution than the UK Government has been – and pave the way for better payment practices across the UK construction sector.

Kirsti Olson is a construction dispute resolution partner at Dentons