Retentions in construction contracts are a percentage (typically around 3-5%) of sums due that are held back by employers from payments to main contractors or by main contractors from payments to subcontractors and so on down the contractual chain.
Usually half of the sum retained is released at practical completion with the balance released at the end of a 6 or 12 month defects rectification period.
The demise of Carillion, with many suppliers losing significant sums, a BEIS Consultation on the use of retentions and the introduction of a Private Members Bill suggesting a retention deposit scheme (the "Aldous Bill") mean that retentions are a hot topic at the moment.
The Impact Assessment for the BEIS consultation estimated that the total amount held in retentions each year is in the region of £3.2 to £5.9 billion with around £229 million not paid out due to upstream insolvency.
At the Construction News Summit on 20 November 2018 the Construction Minister announced that the government is going to make changes to deal with retentions although we don't yet know what those changes will be.
His comments indicate that it probably won't be an outright ban and that the preferred solution may be to allow retentions but hold them in a way that protects them in the event of payer insolvency.
JCT main contracts already provide that retentions are held on trust and include a requirement, if requested by the contractor, to put the retention into a separate bank account designated as a trust account. However, no such rights appear in the subcontracts.
While those provisions, if used, would provide the type of protection being discussed, typically these are deleted due to the practical difficulties for employers in setting up and managing such accounts.
It may also be that main contractors are not aware of their right under the JCT to ask for the retention to be protected in this way: in 2007 there was a case where a contractor was successful in enforcing the use of these provisions.
Retention bonds and project bank accounts can also be used to provide protection of retentions but take up is very limited, which is thought to be due to costs involved.
With narrow profit margins and cash flow being so important to contractors perhaps it is time to rethink how retentions are dealt with.
Construction minister Richard Harrington has told day one of the Construction News Summit that the government will make an announcement on changes to retentions “very soon”. Mr Harrington told the audience that the retentions system “was something very Victorian” that the government was looking to change. The minister said he was aware of the split within the industry on the topic, citing those in favour of a complete ban; those that wanted retentions to remain; and the third that backed a ringfenced protection scheme as advocated by the Aldous Bill, which he referred to as “the escrow solution” and hinted at being his favoured solution.
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