Retentions under the spotlight … again?

United Kingdom

Shortly before the dissolution of Parliament last week, a Private Members' Bill was introduced to reform the treatment of cash retentions in the construction industry. This follows an announcement last year by the Department for Business, Innovation and Skills (BIS), now the Department for Business, Energy & Industrial Strategy, that a review of the practice of retentions in the construction industry was to be carried out (discussed in our previous Law-Now here).

As explained in our previous Law-Now, the 2009 amendments to the Housing Grants, Construction and Regeneration Act 1996 brought a measure of regulation to the use of retentions through its prohibition on conditional payment provisions. The Government also launched its Construction Supply Chain Payment Charter in April 2014 with a commitment to move to zero retentions by 2025. The Government's desire to reform retentions was confirmed again in January 2016 with the BIS announcement of a review of the practice of retentions in the construction industry.

Until recently it appeared that retentions reform had been kicked into the long grass as little progress followed the BIS announcement. However, in a motions debate in the House of Commons on 26 April 2017, Mr Alan Brown (member for Kilmarnock and Loudoun) introduced a Private Members' Bill “to make provision to safeguard, and for the release of, cash retentions”.

During the Bill’s First Reading slot, while acknowledging the rationale for the retention system, Mr Brown emphasised some of the problems which arise with cash retentions:

  • retentions are often not released in a timely manner requiring small to medium enterprises (“SMEs”) to spend precious man hours chasing for their release;
  • retentions may be lost altogether due to the insolvency of a firm's upstream contractor or employer; in 2015 SMEs across the UK lost almost £50 million worth of retentions due to insolvencies of this sort; and

  • insolvency risks arise for small firms with money tied up in retentions; according to a survey carried out by the former BIS, debts of £20,000 or less were enough to threaten the viability of 25% of SMEs.

Mr Brown noted that there was “cross-party support for ending cash retentions” and provided other possible routes for the construction industry to follow. These included:

  • Project Bank Accounts which are operated on all Scottish Government projects where the Government is the employer.
  • Retention monies to be ring-fenced in separate bank accounts in compliance with legislation, as happens in the United States, Australia and New Zealand.

The Bill was scheduled for its Second Reading on 12 May, when the text of the Bill would usually be released, however with the dissolution of Parliament last week the Bill will now need to be reintroduced after the General Election (assuming Mr Brown is re-elected). Whatever the fate of this particular Bill, retentions reform appears to be gathering momentum.