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Retention in construction contracts: a thing of the past?

Insights / / London

Lord Aberdare’s Construction (Retentions Abolition) Bill 2021-22 (‘the Bill’) is the latest of a long string of attempts to drive legislative changes surrounding cash retention in the construction industry.

Retentions, as defined in the Bill, are:

‘… monies which are withheld from monies which would otherwise be due under a construction contract, the effect of which is to provide the payer with security for the current and future performance by the payee of any or all of the latter’s obligations under the contract.’

The inclusion of this type of term has been standard practice for a while as a method of protecting the buyer from incurring remediation costs due to defective or incomplete works in the event that a contractor does not remedy the issues.

However, this structure does not come without its flaws. There is an inherent imbalance against the contractor in deferring partial payment during the construction period when no defect or error exists at that time. At the very least, this can result in cash flow issues and in the more extreme circumstances, retentions can be unrecoverable if insolvency occurs further up the supply chain. Back in 2018, these risks were illustrated in the high-profile liquidation of outsourcing giant, Carillion, which resulted in the loss of £800 million in retention funds owed to various subcontractors.

While that large scale collapse drew government attention to the need for reform in the construction industry, the consultation period which began in 2017 found that those hit the hardest by retention non-payments are small businesses. However, no firm recommendations came from the consultation. The Aldous Bill became the next victim of the legislator’s prorogation in 2019, despite gaining the support of a Coalition totalling more than 550,000 members. Its introduction came just six days before the collapse of Carillion and sought a cap on the amount of time retentions would be held for and a mandated deposit scheme. While industry giants threw their support at the Aldous Bill, it is not yet clear whether this new Bill will gather the same extent of industry support because it is at an early stage.

The Aldous Bill became the next victim of the legislator’s prorogation in 2019, despite gaining the support of a coalition totalling more than 550,000 members. Its introduction came just six days before the collapse of Carillion and sought a cap on the amount of time retentions could be held and a mandated deposit scheme. While industry giants threw their support at the Aldous Bill, because it is at an early stage it is not yet clear whether the new Bill will gather the same extent of industry support.

The Bill proposes to amend the Housing Grants, Constructions and Regeneration Act 1996 to provide that any provision within a construction contract which allows a payer to withhold retention monies will be ‘of no effect’ from 25 January 2025 and any retentions withheld at that date must be repaid in full within 7 days.

The Bill has now progressed to its Second Reading in the House of Lords and can be accessed here.

If you have any questions or require any advice surrounding the contents of the new Bill, please do not hesitate to get in touch with AdrianBingham@incegd.com, IanChappell@incegd.com, RachelStanley@incegd.com or your usual contact at Ince.

Ian Chappell

Ian Chappell Partner, Deputy Head of Real Estate

Adrian Bingham

Adrian Bingham Partner

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