Out-Law Analysis | 19 Sep 2019 | 1:58 pm | 2 min. read
Retention refers to money due to a contractor, but held back for payment by the client at a later stage in the project cycle. Retentions are usually deducted as a percentage, typically 3%, from payments to the contractor over the course of the works; with half repaid at practical completion and the remainder payable once any defects identified following completion are addressed.
Many clients see retention as providing much-needed security to incentivise the timely and proper completion of defects. However, for the supply chain, retention can represent a substantial element of profit margin on a job as well as impacting on day to day cash flow.
From a supply chain perspective, cash retention remains an issue to be adequately addressed by the construction industry – something that was brought home by the Carillion insolvency in early 2018. On 9 January 2018, Conservative MP Peter Aldous introduced a private member's bill containing a statutory scheme to hold contractual retentions.
From a supply chain perspective, cash retention remains an issue to be adequately addressed by the construction industry.
The Construction (Retention Deposit Schemes) Bill will not now pass into legislation following prorogation of the UK parliament. However, it represents the latest in a line of initiatives stretching back to the 1990s to improve cash flow down the construction supply chain – in many cases led by major client organisations, as well as the supply chain.
Build UK, an industry body representing both the demand and supply side, published minimum standards on retentions in June, which it is asking its members to commit to as an interim measure ahead of an ambition to phase retentions out completely by 2025. These minimum standards include:
Together with others in the industry, Build UK is also exploring the increased use and responsiveness of retention bonds as an alternative to cash retentions. Here, the amount that would otherwise have been held in retention is paid to the contractor but secured by a bond, which may be called upon by the client in the event that practical completion is not achieved or defects are not remedied within the time period stated in the bond.
On the client side, Build UK member Network Rail has adopted an approach driven by its Fair Payment Charter. The charter was signed in 2011 by the commercial directors of Network Rail's tier 1 supply chain committing them to such principles as ensuring that the lower supply chain has the right to receive "prompt, predictable and correct" payment when due, and to promote "consistent, effective and equitable cash flow for companies throughout the rail supply chain".
Recently, Network Rail has given effect to these principles in its revamped suite of procurement contracts based on the Infrastructure Conditions of Contract (ICC); such as its NR9 Design and Construct Version based on the ICC Design and Construct Version June 2018. One of its requirements, expressly stated in clause 3.5C, is for contractors to forego entirely their right to hold cash retention and for this principle to apply down the supply chain.
As we enter a period of market turbulence, while the industry contends with the challenges of Brexit and economic uncertainty, the success of these initiatives will need to be carefully monitored. Crucially, the viability of alternatives to cash retention and whether they provide adequate protection to clients will need to be evaluated.
Khalid Ramzan is a construction expert at Pinsent Masons, the law firm behind Out-Law.