Campaign for cash retentions reform

A total of 271 MPs across all parties support the reform of cash retentions.

[edit] Introduction

Cash retentions are monies held back by larger contractors and clients from subcontractors where issues of non-performance arise, such as defects arising on work undertaken.

Retentions are held by private and public sector clients against their subcontractors, with over £10.5bn of SME working capital locked in retentions annually. Some £7.8 billion of this has been unpaid in the last three years.

However, the system is often abused, negatively impacting many businesses in construction, particularly SMEs.

As a result, ECA, BESA and various partner organisations have been pressing Government to reform this practice. Reform of cash retentions in construction is now supported by a broad range of politicians, business bodies, construction trade associations, and professional bodies.

[edit] Impact of retentions

Deprivation of working capital leaves businesses unable to grow (bid for new work), invest (engineering R&D and investment in digital transformation), recruit (new workers and apprentices), pay tax bills, and therefore precludes productivity improvement.

As retention monies are not protected, ring-fenced or held in trust, if a contractor goes bust, the money is lost by subcontractors, and goes to other creditors, often outside the industry.

In the UK, recent government research shows £700m of retentions were lost from upstream insolvency over a three-year period (prior to the collapse of Carillion). For each working day, the industry loses almost £1m, £4.5m per week or £20m per month.

Research has found that SMEs spend on average 130 hours per year chasing late payment from larger firms. And 34% of SMEs borrow to cover cash-flow issues caused by cash retentions. Often this is written off as bad debt, due to the resource implications of chasing monies due.

Cash flow issues leave businesses unable to:

• bid for new work
• take on new workers and apprentices
• pay tax bills, and
• improve productivity.

The knock-on effects of cash retentions can also include stress and mental health issues.

The current system is also a causal factor in bringing about a less efficient public procurement system and results in lower tax receipts for the public purse.

[edit] About this article

This article is an amalgamation of two articles that first appeared on the website of the Electrical Contractors’ Association (ECA) in March 2019: 'About the campaign' can be accessed here ; the 'Impact of retentions' can be accesed here.

--ECA

[edit] Related articles on Designing Buildings Wiki

• Retention bond
• Retention in construction contracts
• Defects liability period DLP
• Construction (Retention Deposit Schemes) Bill 2017-19
• Performance bond for construction
• Defects in construction
• Bonds in construction contracts
• ECA articles
• Final account
• Final certificate for construction contracts
• Liquidated damages in construction contracts
• Valuation of interim payments
• Right to payment
• Variations in construction contracts
• Contract sum
• Domestic sub-contractor
• Insolvency in the construction industry

[edit] External references

• Construction Manager, 20 November 2017, 60% of engineering firms say turnover is held in retentions.