In this article Jonathan Hyndman, Partner at Rosling King, takes a close look at the subject of construction industry retentions following the Carillion disaster.
The use of cash retentions is common place in the construction industry. Some £3 billion of retentions remain outstanding in the UK construction industry at any one time. With the collapse of Carillion, however, has the industry had enough?
By deducting and retaining a percentage of the value of the works from interim payments due to the contractor during the construction phase, developers can be seen to enjoy an element of protection against late completion and defects arising during the rectification period. Similarly, main contractors will deduct and retain a percentage from each interim payment due to their subcontractors again, to be released when the subcontract works have been completed and when the subcontractor has made good any defects.
Widespread and persistent failures to release retentions on time or at all, whether as a result of simple breach of contract or the insolvency of the party holding the retention, has encouraged contractors at all levels of the supply chain to price the risk of their retention not being released into the contract sum.
Reform of retentions in construction contracts has long been called for and The Construction (Retention Deposit Schemes) Bill, introduced as a Private Members’ Bill, received its first reading in the House of Commons on 9 January 2018; the Bill’s second reading is scheduled for 27 April 2018. Carillon’s collapse has brought the importance of the proposed legislation sharply into focus.
The intention behind the Bill is the introduction of secondary legislation requiring cash retentions to be paid into a Government approved scheme and so ring fencing them from the other assets of the party holding the retention; the party to whom the retention is due will still be incentivised to complete on time and remedy defects but in the event of the retention holder’s insolvency, the cash retention, held in a Government approved scheme, would fall outside the insolvency process and would be available for downstream release before any creditor distribution.
The proposals have met with widespread support through the construction industry with the statutory deposit scheme required in relation to deposits paid by tenants of shorthold tenancies to landlords being cited as a working example.
Reform of retentions is overdue and welcomed. The intended protection of retentions against upstream insolvency in the construction industry will unfortunately come too late for Carrilion’s sub-contractors and suppliers.
RK LLP is a UK-based law firm specialising in serving the needs of financial institutions and private equity, real estate and construction clients. www.rkllp.com
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