Retention sums could be held in a third-party bank account as an alternative to a complete ban, according to a government consultation on proposed changes to payment practices.
More details on how the two alternative options would work emerged in a consultation document on the measures published by the Department for Business and Trade yesterday afternoon (31 July).
The government yesterday unveiled an eight-point list of proposals that revealed it was considering options to “reform or ban cash retentions” in construction contracts.
On the reform option, the consultation document said: “This proposed measure would allow the use of retention clauses in construction contracts and require any retention sums withheld to be protected.”
Introducing this measure would mean amending the Housing Grants, Regeneration and Construction Act 1996, the document said.
“Payers would have a choice of either segregating the retained sums in a separate bank account and protecting the sums through an instrument of guarantee (insurance or surety bond).”
Under the proposal, retention sums would be released automatically at the end of the rectification period unless formal notice is given.
Funds would be segregated and held for the benefit of the payee, with the market responsible for providing appropriate bank accounts or guarantees.
The proposals would allow for a single account to hold multiple sums, provided separate ledger entries are maintained for each payee and contract.
Under this option, interest accrued on retention would belong to the payee.
Payers would also face new obligations to keep accounting records for withheld sums, report their status to payees, and offer timely access to those records without charge.
Where a construction contract lacks provision for these protections, the Scheme for Construction Contracts would imply the relevant terms by default.
Disputes over retention timing or amounts would continue to be resolved through existing adjudication and dispute resolution processes, the consultation said.
The other option – for a complete ban on retentions – would also be introduced through the Housing Grants, Regeneration and Construction Act 1996.
It would make it unlawful for payers to deduct and withhold retention sums from payments to payees.
“Payers could choose to seek alternative forms of insurance or surety, but this would not be mandated,” the document said.
The consultation is seeking views on what length of transitional period the industry would need to adjust to any retentions ban.
Justifying its move to shake up current retentions practices, the government consultation said: “Retention payments can be subject to late, partial or non-payment for the supply chain, or permanently lost through upstream insolvency.
“In addition, payment release mechanisms are often linked to dates that are not explicitly related to the completion of a supplier’s work.
“This can benefit those who retain the retention and have a negative impact on the supplier, as the amount held at any one time across all contracts can be significant.”
Responding to the retentions proposals, David Allen, director of Civil Engineering Contractors Association (CECA) Southern, said: “CECA will also continue to campaign for the abolition of cash retentions in the construction sector, which lock up funds that could be put to better use.
“As an industry, if we get this right, we will unlock cashflow across our sector. In doing so we will support SMEs and specialist contractors, allow businesses to operate under more sustainable margins, and free them to deliver the vital infrastructure that businesses and communities rely upon every day.”
Richard Beresford, chief executive of the National Federation of Builders, said: “The use and structure of retentions have become increasingly problematic and so alongside late payment, the construction industry has a fantastic opportunity to expose how the supply chain is propping up bad practitioners.”
But barrister Rudi Klein, former chief executive of the Specialist Engineering Contractors Group, who has long campaigned for retentions reform, warned banning retentions might not work.
He said: “It’s a very easy thing to get around. Lawyers can find other ways of helping to get money back,” he said.
“If retentions were ring-fenced and held in trust, they couldn’t be accessed by the contracted parties until an agreed time.”
Klein also pointed out that a 2017 government report on retentions reform had failed to achieve change, after the previous government took two years to respond to the ensuing consultation.
“They carried out a consultation and did nothing, as is usual,” he said.
The consultation held after the release of the report saw industry oppose the continued use of retentions and call for a change in the law.
Instead, Klein said, industry bodies Build UK and the Construction Leadership Council came up with their own roadmap of ending retentions by 2025, which he said failed.