The retention system dates back to the 1840s when rapid railway construction led to large numbers of construction companies being formed and many, subsequently, becoming insolvent. Clients started deducting money from payments to ensure there was a fund to help them cover the cost of completion.
Clients retain a percentage (typically 5%) of the value of the work to offset the cost of correcting any defects or a contractor not finishing a job. Half of the retention monies are normally paid when practical completion is reached, but recovery of the final portion is unlikely to be obtained until a certificate of making good defects, or a final completion certificate equivalent, has been issued under the main contract, typically a year later
This means that payment of one subcontractor's retention can be held up on account of problems occurring on the job that have nothing to do with the contractor.
For contractors and subcontractors, the retention often represents their profit on a job. Before the recession in 2008, it was less of an issue. Contractors were regularly achieving high tender margins so the impact of not chasing retention payments in an organised and timely manner was not sufficient to lead to financial difficulties. However, since construction margins have fallen, the size of retentions has become a much more pressing issue.
Sub-contractors argue that release of the final portion is often abused because main contractors sit on the cash to rake in the interest being accrued.
Why are retentions withheld?
- To provide the employer with funds to rectify a failure by the contractor to complete the work to the standard required
- To provide an incentive for contractors to return to site to remedy defects following handover of the works.
- To provide a safeguard against over-valuation of the works
- Protection against contractor insolvency
- To provide easily accessible, interest-free cash.
Since the liquidation of Carillion, there has been added impetus across the industry for a change to payment practices – enforcement of fair payment as well as a need to revisit retention practices. There are three possible options:
- Maintain the status quo
- Abolish retention payments
- Put retentions in trust
Maintain the status quo
This option has little support. When contractors enter administration or if the business is liquidated, those owed money have little chance of recovering what is owed to them, despite having already provided their services.
Abolish retention payments
There is limited support for this option. One of the reasons retention payments are held is because contractors feel they need to have an incentive for their suppliers to complete jobs or return to remedy any defects. Removing retentions would remove that incentive. Retention payments could be replaced by bonds or other mechanisms, but no firm proposals as to how to abolition would work have been presented. There is no way of knowing over what timeframe they would be abolished, whether it would be piloted, if the abolition would be voluntary or backed by legislation.
Put retentions in trust
This option has the widest support across the industry. There is a Private Members’ Bill going through Parliament, the Construction (Retention Deposit Scheme) Bill 2017-2019. This is also known as the Aldous Bill, after its main sponsor, Peter Aldous.
As of September 2018, the Bill has the support of one in four MPs across all parties, 85 trade federations representing around 800,000 construction employees.
Peter Aldous said:“This coalition of support shows the urgent need for reform and unity of industry following Carillion. Support covers so much of the industry that we now have a golden opportunity to change construction for the better. I hope government gets behind industry and this Bill. We need action to protect SMEs before more millions are lost, and this Bill is about ensuring people’s money is safe so businesses can grow and invest in their future.”
Peter Aldous spoke at the National Federation of Builders’ annual conference on 26 November 2018.
The NFB is working with the Federation of Master Builders to organise a roundtable on retentions. This will bring all sides of the debate together to explain positions and to provide detail on how the respective options will work. While organisations may say they support a particular option, there is very little detail on what that means and how each option would work. The roundtable would be an opportunity to shed some light onto these areas.