Retention is an agreed proportion of money (usually 3 – 5%) due under a construction contract which is withheld to encourage the contractor to successfully complete works and to safeguard against any defects. Often Retention is not paid to the contractor for 12 –18 months after completion.
What are the problems?
Cash flow
Cash flow problems arise because the contractor is denied payment for work it has already completed. This becomes more damaging to sub-contractors who are further down the supply chain where profit margins are narrow and the Retention can often represent the majority if not all the profit on any given project.
Increased client costs
As a result of concerns about cash flow some contractors may increase the cost of works in order to offset the risk of not recovering the Retention on completion.
It undermines business relationships
There is no evidence to suggest Retention encourages the performance of contractors. If anything, Retention undermines the business relationship between client and contractor by creating an atmosphere of distrust.
It is not used in other areas
The process of Retention is almost entirely unique to the building industry. Retentions are not generally applied to other forms of construction, such as the shipbuilding and aerospace industries, where contract payments are generally made at defined stages in the contract, dependant on satisfactory completion of scheduled work.
It is an administrative nightmare
Administrative problems such as keeping records on outstanding Retention, chasing release of Retention at the end of the defects liability period and trying to find out who has the authority to release Retention a year or more after the project is completed all have added financial implications.
The risk lies with the sub-contractor
Sub-contractors are at an increased risk of Retentions being lost as a result of the main contractor becoming insolvent.
Retention reform
The alternatives
If the real purpose of Retention is to protect against defects, then there are more suitable alternatives such as; Zero Retention Contracts, Retention Bonds, Performance Bonds, Parent Company Guarantees or Insurance.
Steps taken by the UK Government
Over 40% of all new construction projects are publicly funded. The Department for Business, Innovation and Skills has recently announced a review of the practice of Retentions. In April 2014 the Government launched the Construction Supply Chain Payment Charter with a commitment to move to zero Retentions by 2025.
Steps taken by the construction industry
Companies such as British Land and Barratt Developments have already moved away from Retention percentages and have started using zero Retention construction contracts.
Many main contractors now operate a supply chain agreement with sub-contractors. By repeatedly working with the main contractor, the sub-contractor should see defects reduce through familiarisation and good working practices. ultimately eradicating the need for Retention.
Industrial bodies such as the National Specialist Contractors Council and the Specialist Engineering Contractor’s Group are all campaigning for major change on the issue of Retentions. The Fair Payment Campaign is gaining a lot of support and exposure and their message is clear:
“Retention is an outdated practice in the modern day construction industry and it should be abolished.”
Should you require advice on Retentions, please contact DTM Legal’s construction expert, Jim Morris, on 01244 354800 or jim.morris@dtmlegal.com
