Retention in construction contracts

[edit] What is retention?

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 paid 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.

In the US, this is known as Retainage.

[edit] What happens to retention?

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 at the end of the defects liability period.

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] How is retention processed?

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.

[edit] What are the problems with retention?

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.

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.)

The construction supply chain payment charter proposing abolishing retention by 2025.

For more information, see The problems with retention.

[edit] What alternatives are there to retention?

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.

The 2017 Pye Tait Review suggested that alternatives to retentions might include:

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

[edit] What attempts have been made to reform retention?

[edit] 2017

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)

[edit] 2018

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 chartered 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] 2019

In a surprising twist to the debate, in March 2019, housebuilder Persimmon announced it would allow homebuyers to hold back retentions until snagging issues are dealt with, to improve its reputation for quality and customer care.

In June 2019, Build UK published a set of minimum standards on the use of retention payments in the industry. Ref https://builduk.org/news/2019/06/build-uk-moves-forward-on-achieving-zero-retentions/

In December 2019, a consultation was launched regarding the ring-fencing of retentions in Scotland.

On December 9 2019, The Construction Leadership Council (CLC) endorsed the Build UK Roadmap to Zero Retentions. Ref http://www.constructionleadershipcouncil.co.uk/wp-content/uploads/2019/12/Press-Release-09_12_19.pdf

[edit] 2020

On 27 February 2020, in a debate in the House of Commons, in what has been seen as a backward step, Minister for Business and Industry Nadhim Zahawi siad: "It is important that any action we take is robust, proportionate and evidence based, which is where we are at the moment. Several policy options are under consideration, including the retention deposit scheme. It would be premature to commit to anything at this stage while several policy options are under consideration."

[edit] 2023

In a House of Lords debate in December 2023 the government said it wanted the industry to come to a consensus on the issue itself. The CLC had previously the ambition of abolishing retentions from the industry by 2025, this plan was however also dropped around this time.

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.”

[edit] 2024

In the early 2024 the Electrical Contractors’ Association director of legal and business Rob Driscoll told Construction News: “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, cashflow is squeezed and insolvencies rise.”

He said he agreed with Lord Stunell’s comments and that New Zealand had provided a template for reform of the issue last year by passing a law that changed the system. The law mandates that all retention money is held in a trust and cannot be used for any purpose other than fixing defects.

Following previous lobbying from the CLC, retentions clauses are no longer standard in NEC contracts. It has lobbied JCT to make similar changes to its new contracts, which will be published later in 2024.

[edit] Related articles on Designing Buildings

• Bonds in construction contracts.
• Campaign for cash retentions reform.
• Certificate of making good defects.
• Construction (Retention Deposit Schemes) Bill 2017-19.
• Defects liability period DLP.
• Failure to complete construction works.
• Final account.
• Final certificate.
• Housing Grants, Construction and Regeneration Act HGRA.
• Insolvency in the construction industry.
• Interim certificates in construction contracts.
• Liquidated damages in construction contracts.
• Performance bond for construction.
• Practical completion.
• Project bank account.
• Retention bond.
• Right to payment.
• Valuation of interim payments.

[edit] External references

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

Comments

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Is there actually going to be a reduction in the retention percentage after the agreed defect liability period is over?

It depends what it says in the contract, but typically any remaining retention is released on certification of making good defects at the end of the defects liability period.