Cash Retention in the Construction Industry
Construction Enquirer has reported that there is political support for holding sub-contract cash retentions in trust via a secure deposit scheme. Over 170 MPs are apparently in favour of this, but have these well-meaning Members actually thought about the practicalities?
Retentions are always a contentious issue in both main and sub-contracts. The concept is simple: hold back 3% or 5% or even 10% of each payment against the risk of defects and insolvency, and if the contractor does the work properly, or fixes any defects promptly, they get it back. Simples. Sadly this is rarely the case, as the parties next up the contractual chain often hold onto retentions just because they can. Undoubtedly the contractors need better protection, but it’s not a one-sided problem. In practice:
- While the majority of contractors deal with defects, quite a lot don’t, and the employer/main contractor needs access to the retention to pay for the problems to be remediated. If the contractor is not of the amenable variety in respect of defects, they are going to argue about their client taking the retention from a secure scheme account. The client is going to be stuck in the middle of some form of procedure to recover its money when it needs that money to pay for the remediation work.
- Retention money held in a secure scheme will, in the event of insolvency, be payable only when the contractor is in insolvency as defined by the contract…assuming that there is a contract. The JCTs define insolvency as being in one of the formal insolvency procedures, and no doubt the scheme would use a similar definition. The problem is that the contractor can be in an insolvency position months before it enters into one of the formal procedures, and the time when the client needs access to the retention money is usually in the period after work has ceased on site but before the insolvency process is properly commenced.
- Unless there is a project bank account, or advance payment, both developers and main contractors are actually funding the development, in that they are paying for works executed and supplies ordered well before they themselves get paid for them. The retention forms a critical part of their cashflow. Maybe that shouldn’t be the case, but it is, and if that money is locked up in a scheme that means that there is a significant shortfall of funding in the industry.
- No-one needs more paperwork. However well conceived, a secure deposit scheme means more paperwork, and the building industry is not known for the excellence of its paperwork
- If a developer or main contractor doesn’t want to give back retention money, legitimately or otherwise, the existence of a secure scheme won’t make the slightest bit of difference. In the same way as pay when paid is unlawful, or late payment is supposed to attract interest, the unscrupulous will simply use negotiating power and sheer size to ensure that the sub-contractors still get their retention only when – actually if – their clients want to pay them.
I wish it were not so. I wish that contractors did the work properly, dealt with defects quickly and efficiently, and retentions were paid on time. But that’s not reality, and I don’t think that a secure deposit scheme is actually going to solve those problems. Sensible contract terms, however, just might help.
For more information on this topic please contact Derryn Rolfe, or you can give us a call on 0345 070 6000.