Retention in construction contracts

[edit] Introduction

Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate, that is deducted from the amount due and retained by the client. The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract.

Retention can also be applied to nominated sub-contractors, and the main contractor may also apply retention to domestic sub-contractors.

Half of the amount retained is released on certification of practical completion ('substantial completion' for Institution of Civil Engineers (ICE) contracts) and the remainder is released upon certification of making good defects (or 'final statement' for design and build contracts such as Joint Contracts Tribunal (JCT) DB 16).

Interim certificates should make clear the amount of retention and a statement should also be prepared showing retention for nominated sub-contractors.

The contract may require that retention is kept in a separate bank account and that this is certified to contractors. In this case, the client will generally keep any interest paid on the account.

NB: On construction management contracts, a separate certificate of practical completion must be issued for each trade contract and so there are a number of defects liability periods. This means that retention must be released as required for each individual trade contract. The same is true on management contracts, where each works contract must be certified individually.

[edit] Reform

Retentions can be large amounts of money and may cause cash flow problems for contractors. It has even been suggested that retention clauses do not comply with the Housing Grants, Construction and Regeneration Act, which sets out requirements for the withholding of payments.

A possible alternative to retention is a retention bond, where the client agrees to pay the amounts which would otherwise have been held as retention, but instead a bond is provided to secure the amount that would have been retained. As with retention, the value of the bond will usually reduce after practical completion has been certified.

Other proposals include putting retention in a trust account, and the construction supply chain payment charter proposed abolishing retention by 2025.

In 2014, Debbie Abrahams, MP said: “There is evidence that cash retentions have been used to shore up the working capital of local authorities and tier 1 suppliers... There is a key concern that if tier 1 suppliers become insolvent, the small businesses in the supply chain are at risk of losing their retentions.” (ref. Construction Enquirer 24 November 2014.)

In October 2017, the government published the Pye Tait review; Retentions in the Construction Industry, BEIS Research Paper 17. The review sought to assess the costs and benefits of retentions and alternative mechanisms. It found that the average retention was 4.8%.

The report found that reasons for non-payment or late payment of retentions included:

• Disputes over defects.
• Contractors becoming insolvent.
• Non-payment in a higher tier of the supply chain.
• Contractors not asking for their retention money, with some tier 3 companies pricing work to offset the retention costs, and others keen to maintain good relationships with their main contractor.

This can result in higher overheads, poor relationships, constraints in growth and in some cases, insolvency.

Following the review, the government launched a consultation into 'the practice of cash retention under construction contracts'. (Ref. https://www.gov.uk/government/consultations/retention-payments-in-the-construction-industry)

In January 2018, following the collapse of Carillion, several main contractors backed a call to put an end to retention payments. Build UK, the Civil Engineering Contractors Association and the Construction Products Association provided a joint submission to the ongoing government consultation, stating that; 'The industry is fully committed to achieving zero cash retention and we believe that Government must introduce legislation to ensure there is zero cash retention within the industry by no later than 2025.'

On Tuesday 9 January 2018 former charted surveyor Peter Aldous MP introduced The Construction (Retention Deposit Schemes) Bill 2017-19 to Parliament under the Ten Minute Rule which would ensure that retentions are held in a third party trust scheme.

[edit] Alternatives

The Pye Tait Review suggested that alternatives to retentions might include:

• Project bank accounts.
• Retention bonds.
• Performance bonds.
• Escrow stakeholder accounts.
• Parent company guarantees.
• Retentions held in trust funds.

[edit] Find out more

[edit] Related articles on Designing Buildings Wiki

• Construction (Retention Deposit Schemes) Bill 2017-19.
• Certificate of making good defects.
• Construction supply chain payment charter.
• Contingency.
• Contract sum.
• Defects.
• Defects liability period.
• Final account.
• Interim certificate.
• Nominated sub-contractor.
• Off site materials.
• Practical completion.
• Retention bond.
• Retention held in trust fund.
• Right to payment.
• Sub-contractor.
• Surety.
• Work-to-complete list.
• Working capital.

[edit] External references

• Housing Grants, Construction and Regeneration Act.
• Construction Manager, 20 November 2017, 60% of engineering firms say turnover is held in retentions.

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