The use of retentions in the construction industry is a well-established practice. A percentage of each payment made under a building contract or sub-contract is retained by the “payer”, primarily as a safeguard against failure on the part of the “payee” to rectify defects in the works. However, a recent industry-wide consultation has revealed that the use of retentions, particularly delays in their subsequent release to the “payee”, is having a significant impact upon the viability of smaller firms.
Partly in response to this consultation, the Government recently published the text of a Private Members Bill proposing to reform the way in which cash retentions are managed. The Construction (Retention Deposit Scheme) Bill seeks to amend the Construction Act to make it mandatory for all such retentions to be held in a deposit scheme (potentially operating in a similar manner to those in respect of tenancy agreements, however, the details are unclear at present).If no scheme was in place, then no retentions would be permitted under the contract. This mandatory obligation will also apply to any existing retentions, with these needing to be transferred into such a scheme. Failure to comply would mean the “payer” having to refund the retention in full to the “payee”. This could have a significant effect on cash flow if the project in question is at an advanced stage as any retention is likely to be a considerable amount. Particularly if the “payer” has no fiduciary duties in respect of the retention under the contract.
At this early stage, it is not just the details of how a retention deposit scheme will work that need clarification, it is also the wording of the Bill itself. The amendments it proposes to the Construction Act include a new and wide definition of “Cash Retentions” and the expansion the existing definition of “Construction Contracts”, both of which currently leave enough scope for interpretation to cause potential confusion as to precisely what will be covered. Hopefully, the second reading of the Bill on 15 June 2018 will provide further details.
With many large companies now having to comply with the Reporting on Payment Practices and Performance Regulations, and following the collapse of Carillion, payment policies in the construction industry firmly in the spotlight. So whilst we are some way from the Construction (Retention Deposit Scheme) Bill becoming law, it is certainly worth keeping an eye on its progress.
For more information on this topic, please contact Simon Franklin on 01223 791008, or emailSimon.Franklin@howespercival.com.
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