"Cash out?"- reform of the retention in construction contracts?
Perhaps as some light relief from the omnipresent Brexit, the Department for Business, Energy and Industrial Strategy last week launched two separate consultations: one to appraise the effectiveness of the 2011 changes to the Housing Grants, Construction and Regeneration Act 1996, and the other, perhaps more notably, to consider the wide spread practice of cash retention in construction contracts.
The appraisal of the 2011 changes will ask for input on how effective those changes were in securing their objectives of:
- increasing transparency in the exchange of information relating to payments;
- encouraging parties to resolve disputes by adjudication, where appropriate; and
- strengthening the right to suspend performance.
However, while it is pleasing to see the government assess its 2011 work, it is the consultation on cash retention that will likely raise the most eyebrows, and perhaps even concerns among those at the top of the supply chain.
Retention is a wonderfully simple way for employers and main-contractors to obtain security against the costs of contractors failing to complete works or make good any defects. But, BEIS have opened the consultation because industry research has suggested a number of deficiencies with cash retention such as:
- Retention monies being lost to contracting parties due to the insolvency of those who engaged them;
- Payment of retention monies being made late, or not at all;
- Payment being dependent on performance of obligations under other contracts (which, of course, is a breach of s. 110(1A)(a) of the HGCRA 1996)
BEIS is concerned not only about the negative effects these issues have on the Construction industry, but also on the economy in general.
The consultation seeks to investigate the effectiveness of alternatives to cash retention, with project or escrow bank accounts, retention bonds, performance bonds, parent company guarantees and holding retention monies in trust being cited as examples.
However, each example shares a characteristic absent from the simple cash retention: they all cost money. So, while those lower down the supply chain may, at first blush, welcome the possibility of legislation outlawing cash retention, they may want to consider whether the risk of losing the retention on a project outweighs the cost of paying banking or bondsman's fees on every project.
Dan is an Associate in our Construction team.