Another review of the Construction Act and payment

In January the Government completed two consultations regarding construction in the United Kingdom, the first of these was a review of the operation of changes to the payment mechanisms and adjudication under the Construction Act and the second was a review of retention in the construction industry.

The purpose of this article is to talk primarily about the retention consultation. Retention is one of the most contentious issues within the construction industry as the holding of retention has become more and more of an automated process rather than something that people give thought to when drafting a contract.

The consultation identified a number of key issues. These were:-

  • The scale of retention monies being lost in contractor insolvencies;
  • The practice of making payment of retention conditional upon the performance of obligations under another contract, a practice which was made illegal by the amendments to the Construction Act in 2011;
  • The significant impact of unjustified late and non-payment of retention monies by some contractors; and
  • The need to investigate alternatives, in particular, retention deposition schemes and holding retentions in a trust account.

Retention is normally between 3% and 5% of the total contract value, with half of it being released on practical completion of the works, is actually in total a very large amount of money when considered with the total value of the construction industry. In the case of some projects it can literally run into hundreds of thousands if not millions of pounds of the value of works actually completed.

As a reminder retentions original intent was to protect employers in case the contractor failed to carry out defect correction, or indeed failed to complete the works, and to allow the employer to have any defects corrected without incurring any significant losses. Today, retention has become almost an automatic right.  Few, if any, industries operate with such provisions.  In most contracts today, unless they are signed up on the standard forms, there is no requirement for the retention to be held in a dedicated bank account and there is no obligation on the employer to ensure that the retention sums are ring-fenced.  What this means therefore is that contractors are exposed throughout the project, which could be many years, to having retention deducted which the employer may or may not be able to pay to them at the end of the job.

The consultation was therefore a very important review of this area which has largely gone without mention for many years. The problem is that the alternatives, retention bonds or some other form of security, are themselves expensive and do not achieve the desired effect beyond releasing the full value of the works to the contractor.  The consultation has also considered the need for trust bank accounts, however, the very reason for changes to the retention terms within construction contracts is to take away that responsibility on the employer to hold the money safely for the contractor.

One of the suggestions of the consultation appears to be something similar to the tenant deposit scheme. It is hoped that the Government consultation will lead to action as there is a clear need for action as on many occasions contractors are going into liquidation due to the cash flow problems caused by retention and delays in release of retention.  It is an area that needs real focus from the Government.  It may finally be time to call an end to retention and move to smarter forms of project security.

Should you wish to discuss retention or other forms of project security in construction projects, please contact any member of the Goodman Derrick construction team and we would be happy to discuss this with you.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.