An endemic problem for contractors and sub-contractors within the construction industry is the abuse of the retention system. That abuse can be a failure by a client to return the retention monies at all and/or in accordance with the underlying construction contracts and/or delaying the payment.
The failure to repay the retention can create serious cash flow problems for contractors and subcontractors. As is often the case in the construction industry it is the “little guys” at the end of the supply chain that suffer the most as evidenced by the high level of insolvencies at subcontractor level. The late payment or non payment of a retention can be the deciding factor in whether a business survives or not.
Due to the commercial significance of having a growing construction industry for the UK economy, the Department for Business, Energy and Industrial Strategy is currently undertaking a review of “Retention payments in the construction industry” and will soon producing further guidelines. Save in parallel with that the Government's review, a private members bill, The Construction (Retention Deposit Schemes) Bill is scheduled to have its second reading in the House of Commons on 23rd November 2018. This UK wide bill seeks to introduce mandatory deposit schemes for retentions in construction contracts. This Bill has the support of several MPs and a large groundswell of support within the construction industry.
Retention Desposit Scheme
The Construction (Retention Deposit Schemes) Bill is intended to amend the Construction Act to introduce the mandatory use of a retention deposit scheme. The aim is to ring fence retention monies during the construction process and allow for a fair release of the same at the end of the said process. The proposed Bill will amend the Housing Grants, Construction and Regeneration Act ('The Construction Act'), in 3 key ways:
- creates a third party retention deposit scheme which would retain and safeguard the retention through the construction process.
- any retention clauses within a construction contract shall be held to be invalid, should any party holding retention monies fail to place the same in the retention deposit scheme.
- if a retention not be placed into retention deposit scheme, then the party holding the retention will be required to return the held payment to the payee within 7 days.
Should the Bill become an Act then we can expect to see these changes coming into force in the near future. Save even if the Bill fails to pass through Parliament, the use of a mandatory retention deposit scheme in construction is likely to be a recommendation of the UK Government’s review. It is too early say whether retention deposit scheme’s will alleviate the abuse of the retention system, but one would hope this is a step in the right direction.