Retentions: has the construction industry had enough following the Carillion disaster?

15/02/2018

The use of cash retentions is commonplace in the construction industry. Some £3bn of retentions remain outstanding in the UK construction industry at any one time. With the collapse of Carillion, however, has the industry had enough? Jonathan Hyndman, Partner at Rosling King, investigates.

Gallery

y deducting and retaining a percentage of the value of the works from interim payments due to the contractor during the construction phase, developers can be seen to enjoy an element of protection against late completion and defects arising during the rectification period. Similarly, main contractors will deduct and retain a percentage from each interim payment due to their sub-contractors again, to be released when the sub-contract works have been completed and when the sub-contractor has made good any defects.

Widespread and persistent failures to release retentions on time or at all, whether as a result of simple breach of contract or the insolvency of the party holding the retention, has encouraged contractors at all levels of the supply chain to price the risk of their retention not being released into the contract sum.

Reform of retentions in construction contracts has long been called for and the Construction (Retention Deposit Schemes) Bill, introduced as a Private Members’ Bill, received its first reading in the House of Commons on 9th January 2018; the bill’s second reading is scheduled for 27th April 2018. Carillion’s collapse has brought the importance of the proposed legislation sharply into focus.

The intention behind the bill is the introduction of secondary legislation requiring cash retentions to be paid into a Government-approved scheme and so ringfencing them from the other assets of the party holding the retention; the party to whom the retention is due will still be incentivised to complete on time and remedy defects, but in the event of the retention holder’s insolvency, the cash retention, held in a Government-approved scheme, would fall outside the insolvency process and would be available for downstream release before any creditor distribution.

The proposals have met with widespread support through the construction industry with the statutory deposit scheme required in relation to deposits paid by tenants of shorthold tenancies to landlords being cited as a working example.

Reform of retentions is overdue and welcomed. The intended protection of retentions against upstream insolvency in the construction industry will, unfortunately, come too late for Carillion’s sub-contractors and suppliers.