Bill proposes greater security for SME construction contractors
A Bill which seeks to ensure that retention money is held in a ring-fenced trust scheme is due to have its second reading in the House of Commons on Friday 27 April 2018.
What is retention?
Retention is a contractual practice intended to provide employers on projects with security against defective work or insolvency and incentivise contractors to complete the works on time. It usually involves the employer withholding a percentage (typically 3 – 5%) of the amount due for payment. Ordinarily, the first half of retention is released upon completion of the work or the employer’s taking over of possession of the work (whichever is earlier) and the other half is released following the expiry of an agreed defects rectification period (typically 12 to 24 months).
Problems with retention
The Government recently launched a review of the retention practice due to concerns over the administrative time and cost involved in managing and recovering retention payments and the risks posed by upstream insolvency. These concerns have been amplified following the collapse of Carillion.
According to Mr Aldous MP (who introduced the Bill) almost £8bn of cash retentions has remained unpaid over the last three years and some 44% of contractors have suffered non-payment due to upstream insolvency in the last three years. Almost half of businesses that have had retentions held in the last three years have experienced non-payment due to upstream insolvency.
Contractual solutions to some of the problems identified by Mr Aldous MP are already available but not widely used. Some ‘standard form’ building contracts provide that the employer’s interest in retention is ‘fiduciary’ as trustee for the contractor and that, if the contractor so requests, the employer must place the retention in a separate bank account held on trust. Once set aside in this way, the retention will not be available to be distributed to creditors in the event the employer becomes insolvent.
However, these provisions are often amended by employers so that they are not obliged to treat retention in this way. There are other alternatives to traditional cash retentions such as retention bonds but these are rarely used, often because they can be prohibitively expensive. Properly drafted, a building contract can provide a mechanism offering a compromise between employer and contractor.
Mr Aldous’s Bill proposes a solution under which retention money must be placed in a Government-approved scheme similar to that which applies for deposits taken from shorthold tenancies. Mr Aldous argues that ring-fencing retention in this way would mean that retention would be secure and available to be released on time which would facilitate cash flow.
Avoiding disputes over retention
Whilst the construction industry waits with keen interest to see how Mr Aldous’ Bill progresses, here are 10 tips for avoiding disputes over retention:
- Exercise caution regarding bespoke amendments to ‘standard form’ building contracts. Amendments to provisions regarding payment, defects and time for completion may have knock-on effects on retention release and must be drafted with care.
- If the contract is a ‘construction contract’ under the provisions of the ‘Construction Act’, any terms that make payment of retention conditional on performance of obligations under another contract or the decision by any person as to whether obligations under another contract have been performed are prohibited. To avoid disputes such terms should be resisted by all parties.
- Ensure key project personnel understand the contractual provisions relating to retention.
- Ensure key contractual ‘milestones’ in respect of payment are diarised, including when retention is due to be released.
- Applications for payment of retention money must comply with the contract to avoid any technical dispute regarding the validity of the application for payment. The Courts have stressed the importance of making sure that payment applications are clear, unambiguous and properly set out the sum considered to be due and the basis upon which that sum has been calculated.
- If an employer under a construction contract considers that retention is not due to be released or is to be withheld for making good defects then the employer will need to issue a valid payment notice and/or pay less notice.
- Contractors should respond timeously to any defects issues in accordance with their contractual obligations to avoid retention release being delayed.
- Before using retention money to instruct others to rectify defects, employers should carefully consider the terms of the contract and seek legal advice where appropriate.
- If the contract provides that the retention is to be held on trust, it is possible to apply to the court to enforce the provision and require the retention fund to be set aside in a separate bank account. But this must be done before the onset of insolvency.
- The longer retention is outstanding the greater the risk of non-payment, deal with overdue retention promptly.
If you need advice on any aspect of building contracts, contact me at email@example.com or call 0161 672 1427.
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