A recent study into the effect of insolvency on the construction sector has strengthened calls for a more robust framework to protect retention monies.

Retentions are commonplace in the industry and estimates suggest they apply in 65% of all construction related contracts in the UK. They can vary in value depending on the type of work, the size and nature of the project and the parties involved but will typically be up to 5% of a contract’s value and usually deducted at source from interim applications. They act as a form of security, or bond, which the employer/main contractor can use as an incentive to ensure project completion and the making good any defects, or to cover the cost of so doing. Sub-contractors are not immune, meaning retentions are withheld at all levels on any given project.

There will be contractual provisions that govern how they operate, but the management of retentions is otherwise unregulated and the recent study on behalf of the Department of Business, Energy & Industrial Strategy (BEIS) suggests that retentions worth some £7.8bn have been “lost” over the last 3 years after being withheld and not paid over as a result of intervening insolvency.

Because there are no strict rules governing how retentions are handled, funds are usually deposited in the main bank account of the contractor holding them; they are then obviously mixed with that company’s general funds and other retentions and in the event that company suffers an insolvency, it is potentially very hard for any creditor to “trace” their funds and lay claim to whatever might be left in the Company’s account. After all, the party holding a retention has no right to it unless the contractual provisions kick in; it is certainly never envisaged that these third-party funds would be used to aid a company’s cash flow.

The answer that is being called for is a protection scheme, akin to those operated on behalf of landlords of residential tenants under an assured shorthold tenancy. Those schemes, despite their glitches, have been shown to work well and are compulsory since 2007 under the Housing Act 2004. The suggestion by the Specialist Engineering Contractors’ Group (“SEC”), which represents the interests of engineers and support groups is that the Government needs to step in and impose such a scheme within a statutory framework, pointing out these already exist in Canada, Australia and New Zealand.

Although any scheme will no doubt involve some additional administration and come at a cost, it is hard to find an argument against the proposal; after all we are talking third party funds, which are sacrosanct in many other industries (the ICAEW would not hesitate to take action against us if we were to routinely mix client and office monies, for example).

Consultation on the report is now underway with a deadline of 18 January 2018. The report can be found here if you are interested: https://www.gov.uk/government/consultations/retention-payments-in-the-construction-industry

It is fair to say that Insolvency Practitioners will welcome the presence of a structured arena in which to seek recovery of retentions, but perhaps ought to be braced for a flurry of activity when (note I do not say “if”!) the provisions are introduced, as the impact on cash flow for many contractors could be very significant.

If your business might be affected by the issues raised in this article, now or in the future, we will be more than happy to have an initial conversation with you, without obligation or charge, to see how we may be able to assist. For more information please contact our PCR Head Office on 0208 841 5252 or alternatively, contact us at This email address is being protected from spambots. You need JavaScript enabled to view it.

Danny Allen 

Director 

 

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