Government reviews the use of retentions, does this mean changes for the Construction Industry?

The Department for Business, Innovation and Skills has recently announced a review of how retention arrangements work in the construction industry and the effect in particular on smaller businesses.

Retentions frequently cause issues in building contracts, although their use is widespread in other forms of contracts. In particular, the retention of money due for what can be a considerable period of time and which can be for a significant proportion of the total profit on a contract. This can cause serious cash flow issues for contractors and also their subcontractors.

There is also a widespread concern in the industry that the use of retentions imposes an unnecessary administrative burden on all parties. A retention may act as a practical guarantee for the quality of work done and materials used, but its payment is often in practice under the total control of the contractor’s employer and may be unnecessarily delayed, or even be at permanent risk if the employer faces cash flow problems.

Some of the changes being suggested include the use of a bond system, or the use of payment into trust. Looking at the success of similar schemes used to protect the deposits paid by tenants of residential property shows how effective a simple change to the law can be.

Whilst the debate in the industry will no doubt continue, it will be too late for many businesses that continue to suffer from prolonged and overly excessive retentions, but getting the contractual terms right from the outset can often help to mitigate these issues as a construction job progresses.

David Brown is a partner and can be reached at d.brown@gullands.com