Legislation needed in response to the role of retentions in company insolvency

Speaking to Construction News this week, in the article "Failure to ban retentions ‘contributing to insolvencies’ ECA Director of Legal and Business Rob Driscoll warned of the continued impact of retentions on sub-contractors, unless new legislation is brought in to reform the practice.The article reports that the continued use of retentions in the construction industry is contributing to company failures and insolvencies.

Cash retentions are deducted from payments owed in respect of labour, materials and works already delivered and carried out, and therefore legally belong to the companies that carried out the work. Retentions are on average worth 5% of a contract's total value, but can be up to 20%.

Rob Driscoll said, “With no policy or position in place from government to reform retentions, this long-running bone of contention will fail to be resolved and continue to inhibit productivity and performance by the industry. We know that if economic performance in construction declines, cash flow is squeezed and insolvencies rise.”

The CLC previously had an ambition of abolishing retentions from the industry by 2025, though this has since been dropped. CLC co-chair Mark Reynolds and deputy co-chair Richard Robinson agreed to work further on issues around retentions with Isabel Coman, a director at Transport for London and CLC board member. "With no policy in place to remove retentions, it will make it more difficult for organisations, particularly with the number of companies going into administration increasing and so much cash they need being held back” Ms Coman was quoted as having said.

The government has said it wants the industry to come to a consensus on the issue itself, most recently in a House of Lords debate in December. Lord Malcolm Offord said: “Our long-term aim is to remove the need for retentions altogether.” He explained that the government supported academic work that aims to develop “a quality metric as a viable alternative to the withholding of cash retentions as a form of insurance against defects. We are working with the industry and a lot of consideration has been given to this matter but, ultimately, the construction industry itself needs to come to a consensus on how to improve this area.”

In response, Liberal Democrat Lord Andrew Stunell said ministers were asking for “the greedy lions to sit down with the defenceless lambs and decide what menu is going to be eaten. The reality is that the upper-tier contractors have not just the whip hand but the bank balance. He will know that many of them have a business model that functions only because they retain retentions to which they are not legally entitled.”

The full article, Failure to ban retentions ‘contributing to insolvencies’ published by Construction News can be found here

--ECA

This article is based on the article published on the ECA news and blog "ECA's Rob Driscoll speaks to Construction News about insolvencies", dated January 30, 2023 and extracts from the original article "Failure to ban retentions ‘contributing to insolvencies’ " published by Construction News dated January 29, 2023.

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