What’s Wrong with Retention?

Blog Author: Peter Hibberd

Retentions meet a real need and aren’t a problem in themselves – it’s how they are administered that needs fixing

The clarion call for no retention has persisted for many years and has once more initiated action. This time BEIS undertook a consultation “on the practice of cash retention under construction contracts”, with its outcome imminent. Meanwhile a private members’ bill from Peter Aldous received its first reading but its second is delayed until October. The cynical might consider this a deliberate ploy but it is probably more about the consultation outcome and the possibility of government itself legislating.

Whether retention can ever be abolished depends on how it is defined. BEIS research paper 17 (October 2017) stated “retention is a sum of money withheld from the payments of a construction sector project in order to mitigate the risk that such projects are not completed […] to the required quality standard”. Furthermore, it is “a safeguard against defects which may subsequently develop and which the contractor may fail to remedy”. Whereas under the Aldous bill reference is made specifically to “cash retention […] monies which are withheld from monies which would otherwise be due under a construction contract, the effect of which is to provide the payer with security for the current and future performance by the payee of any or all of the latter’s obligations under the contract” and to a retention deposit scheme.

The voices for abolishing retention have risen following the collapse of Carillion because this has highlighted the issue of firms not being paid for work done, but there is a significant difference between security of payment in the event of insolvency and that of retention. Although both impact upon cash flow, they are quite different in their nature and potential effect.

Retention deposit schemes are appealing but are not problem-free. Their administration brings bureaucracy and associated costs, and implementation depends upon some form of certification – a process as open to abuse as any other. Also any form of regulation brings with it unintended consequences sometimes through creative actions to circumvent the impact of the restriction. In this case the point at which sums become due, their certification and the payment period become the pertinent issues; consequently cash flow may be changed. The total abolition of retention is inappropriate, and even the universal abolition of cash retention is undesirable because the alternatives are not always appropriate to all forms of construction project.

Retention is about risk management and, as a risk of defects will always exist, those who employ firms to carry out construction work will seek to protect themselves. If it is not through retention monies, it will be through other means. Whether alternative forms of protection are better for the parties depends on how well they are administered. Cash retention per se is not a problem: yes, it does mean capital resources need to be somewhat greater, but cash flow should not be a problem so long as the constructor carries out the work properly and the certifier of the work and the payer properly carry out their respective roles under the contract. The non-release of retention is not always wrong—it might arise because work has not been properly remedied and so the retention release is not due. Where it has been properly remedied the retention should be released, but it is evident that there is abuse of the situation. Although there are already appropriate legal remedies available, some believe they are too unwieldy for the sums sometimes involved. However, it seems that if parties cannot act properly in regard to cash retention then it is unlikely they will act any differently under other systems.

Ways of improving the operation of retention have been developed for over 50 years. One of the first developments was for retention to be held by the employer as trustee for the contractor (JCT 63). The employer holds the contractor’s money but this is subject to the right of the employer to have recourse for payment of any amount it becomes entitled to under the contract. The nature of this arrangement was confirmed by Rayack Construction Ltd vs Lampeter Meat Co Ltd (1979). This position, which is primarily about security of monies, was reflected in JCT 98 by providing the contractor can request retention be held in a separate bank account. More importantly, JCT 98 introduced a contractor’s bond in lieu of retention as an optional provision. Nevertheless, calls for abolishing retention have continued.

The use of a retention provision or bond in lieu of retention are provided for in JCT 2016, but to recognise some projects may justify no retention the contract particulars make clear that inserting “nil” in those particulars is the way to achieve this. Those seeking wider protection should consider a performance bond. A potentially greater problem exists for subcontractors in that monies including retention released by employers to contractors in respect of subcontractors’ work may not flow to them on account of the contractors’ insolvency—but this is the security of payment previously mentioned, which requires an entirely different approach, such as the use of a JCT project bank account. Because of the difficulties with small retentions, the JCT subcontract has a provision for a minimum retention—retention is not deducted where it is less than the amount specified.

Although retention bonds, performance bonds and project bank accounts may be preferable in some instances, the answer must be the proper administration of whatever approach is adopted—something that is frequently lacking. Clearly, it is difficult to change behaviour, otherwise the Supply Chain Payment Charter and other initiatives would already have achieved their objective; hence the repeated calls for legislation. Nevertheless, choice is preferable to legislating—which has the potential to create other problems.