Should we retain retentions?
Consultations on cash retentions and the 2011 changes to Part 2 of the Housing Grants Construction and Regeneration Act 1996.
The Department of Business, Energy and Industrial Strategy (BEIS) consultations on cash retentions and the 2011 changes to Part 2 of the Housing Grants Construction and Regeneration Act 1996 (Construction Act) have now closed. The outcomes and the Government's response are awaited with great interest by the industry and may provide the pundits with a little respite from the fallout from the collapse of Carillion.
The consultation on cash retentions appears to have provoked the most reaction. Many commentators have weighed in to condemn the practice and a backbench MP has tabled a Private Member's Bill to propose an alternative to the usual procedure whereby employers withhold a percentage (usually around 5%) from certified amounts as an incentive for contractors to fully comply with their obligations under their construction contracts. The Bill is due to have its second reading in June 2018.
In theory, the idea of a cash retention to secure performance is not such a bad one, given that contractors traditionally operate on very thin financial margins and they will naturally be very keen to ensure that their work is of sufficient standard to allow a timely release of monies due. There is however, the well publicised problem that some unscrupulous employers have been recorded as taking advantage of the retention process by keeping hold of retentions (and thereby use of the money) for longer periods of time than they are strictly entitled, or for not entirely legitimate reasons. Despite payment protection for suppliers under the Public Contracts Regulations and the Supply Chain Charter, the result has been a cash flow crisis and a vulnerable supply chain. This is particularly acute where the employer becomes insolvent. Such a situation is amply illustrated by the downfall of Carillion and the nervous mutterings about the solvency of a number of other high profile businesses.
Alternatives to retentions include the use of retention bonds (where a reducing bond is provided to secure payments which would otherwise have been the subject of retentions) and the use of project bank accounts and trust mechanisms to ring fence and protect retention monies on insolvency. A further alternative is a scheme proposed in the Private Member's Bill which is very like the tenancy deposit scheme currently in use in the rental sector.
The consultation on the 2011 changes to the Construction Act focused on different aspects of payment performance and best practice. It sought information on how current legislation achieves its original objectives of increasing transparency in the exchange of information in relation to payments, encouraging parties to resolve disputes by adjudication and the strengthening of the right to suspend for non-payment. The consultation was also interested in the extent to which the existing construction payment and adjudication framework is working (or not).
Given the very evident concerns about SMEs and the supply chain generally, it is likely that some legislative reform will be proposed when the results of the parallel consultations are published. But will this be sufficient? For example, alternatives to retentions may not work in practice or end up being too expensive, or there may be gaps in the questions raised in the consultation on the Construction Act such as an omission to consult on matters such as a precise definition of the information required for payment/pay less notices. This is currently supplemented by less than clear case law and further statutory guidance would probably assist parties in avoiding disputes as to validity of the notices forming part of crucial stages in the payment process.
Going forward, would legislative change affect negotiation of construction contracts and the balance of risk? It is possible that simply tinkering with only a few aspects of the law in this area will only serve to confuse matters more. Watch this space.
This article is taken from Building Interest - Spring 2018.