“There are many roads to prosperity, but one must be taken. Inaction leads nowhere.” – Robert Zoellick
Cash retentions in the construction industry have always been an area of intense discussion. While designed to encourage contractors to complete works promptly and without defects, it is acknowledged that they are open to exploitation by less than scrupulous employers.
The collapse of Carillion in January 2018 highlighted this issue, when it was discovered the company had been withholding £800m in retention payments. Carillion’s treatment of its supply chain was widely criticised, as sub-contractors were starved of working capital and put at risk of insolvency, through no fault of their own. Yet while it would be easy to suggest this was a one-off event, the reality is that this approach is not uncommon.
In response to concerns surrounding cash retentions, the government launched a consultation in late 2017, yet despite concluding its investigation in early 2018, no feedback has yet been released. It is perhaps unsurprising therefore that others have taken steps in the meantime to promote a change of approach within the industry.
Build UK in particular has stood out in this regard, having called for the abolition of cash retentions by 2025. Build UK’s commitment to this goal was further emphasised in July this year when it released two key documents setting out how it intended to achieve this aim in practice.
The first of these documents, “Roadmap to Zero Retentions” maps the proposed milestones for ensuring a policy of zero cash retentions is in place by 2023. Alongside this, the “Minimum Standards on Retentions” further sets out Build UK’s proposed guidelines and example wording for incorporating these into the JCT Design and Building and NEC4 ECC and ECS contracts.
Some of the suggested standards put forward include:
- ensuring that retentions contained within sub-contracts are no more onerous than those contained within the main building contract to ensure payments are made quickly along the supply chain;
- allowing retentions to only be deducted from payments made with respect to permanent works rather than temporary or preliminary works;
- applying retentions only to contracts worth £50,000 and above, with this increasing to £100,000 from 2021;
- deducting retentions as a single sum at the end of the construction period rather than through interim payments;
- reducing the retention percentage to 1.5%, with this falling to 1% from 2021; and
- adding provisions that allow retention to be released at the sub-contract level through a process which is distinct and dependent from the main construction contract.
By encouraging its members to incorporate these standards into their contracts, Build UK hopes to improve the quality of work carried out, increase assurance that defects will be rectified promptly and ensure better cash flow. However, while this initiative may sound promising on paper, Build UK acknowledge that challenges remain, particularly surrounding a lack of viable alternatives that provide employers with the level of security they have come to expect from cash retentions.
Change, it seems, is necessary to protect all parties in the supply chain, particularly in times of economic uncertainty – whether Build UK’s roadmap to removing retentions become commonplace or the ‘road less travelled’ among industry professionals however remains to be seen.