Consultation shows wide range of views on construction payments

Out-Law News | 27 Feb 2020 | 5:28 pm | 2 min. read

There is little consensus among UK construction firms and their clients around how payment practices and dispute resolution should be reformed, according to feedback to two government consultations.

The UK government carried out a post-implementation review of the 2011 amendments to the Construction Act at the end of 2017 and start of 2018, alongside a consultation on the use of cash retentions. It has now published summaries of the responses to both consultations, two years after they took place.

The government said that it would "continue to work with the construction industry and its clients to achieve a consensus on how to resolve the problems associated with cash retentions". It will use the feedback to the consultation on the Construction Act post-implementation review to inform future work.

Construction disputes expert Lawrence Davies of Pinsent Masons, the law firm behind Out-Law, said: "It is clear that there was a wide range of views expressed in the responses to both consultations, and the likely next steps are difficult to predict".

Davies Lawrence

Lawrence Davies

Partner

It is clear that there was a wide range of views expressed in the responses to both consultations, and the likely next steps are difficult to predict.

"The drafting of the 2011 amendments to the Construction Act, particularly those outlawing 'Tolent clauses' relating to adjudication costs and the new 'notified sum' regime which has led to 'smash 'n' grab' adjudications, came in for heavy criticism from respondents and numerous changes were suggested. It is not yet clear whether any of these will be pursued," he said.

"On retentions, the report says the government will continue to work with the construction sector and its clients to prevent the abuse of cash retentions," he said.

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 deducted at a typical rate of 3% from payments to the contractor over the course of the works, with half generally repaid at practical completion and the remainder usually payable once any defects identified following completion are addressed.

Respondents to the consultation on retention payments generally agreed with the principle behind the practice: to "guarantee performance and eliminate defects in an industry where the quality of work remains inconsistent". However, they raised concerns around the promptness of repayment; the imbalance of market power between main contractors and subcontractors; and the lack of safeguards against insolvency higher in the supply chain.

While there was no clear consensus on an alternative to retentions, respondents tended to be more in favour of a third party retention deposit scheme than other potential solutions such as parent company guarantees and performance bonds. Others suggested abolishing cash retentions altogether, although this was not explicitly proposed as an option for reform by the government.

Respondents to the consultation on amendments to the Construction Act were split on whether the use of adjudication had increased or decreased since the changes came into force. Some also raised the emergence of 'smash 'n' grab' adjudications, a term used to describe claims for the full amount set out in an application where the payer fails to serve a valid pay less notice in time. However, some respondents believed that disputes of this kind were decreasing, in part due to increased awareness by the paying party of the consequences of not serving a payment notice or pay less notice and in part due to the recent body of case law.

On payment, respondents noted that the use of standard contracts was rare with clause amendments "rife". This inevitably led to increased complexity, and to compliance with the 'spirit' of the amendments being lost.