The proposed ban on retentions is moving a step closer, with the Commercial Payments Bill having reached its second reading in the House of Commons. The Bill expressly provides for a ban on retention clauses in construction contracts, representing a significant change with potentially wide-ranging implications for the industry, as explored in this article. You can also read about the wider provisions of the Bill and what they could mean for the social housing sector here.
Retention has long been a familiar, market-standard form of security for employers and main contractors, but one that can place a significant cash-flow burden on businesses further down the supply chain. The Bill’s current approach would remove this mechanism altogether.
What does the Bill prohibit?
The current drafting defines retention widely. It captures provisions allowing a party to deduct or retain a percentage of sums otherwise payable for goods, services or works, an interim payment, or the contract total, pending conditions for release. Those conditions include completion of obligations, compliance with specified conditions and expiry of the defects period.
The Bill is therefore likely to be applied by reference to substance rather than terminology. Calling a deduction “defects security”, a “completion reserve” or something similarly creative is unlikely to avoid the prohibition if it operates in practice like retention.
How will the market respond?
The desire for security against defective or incomplete work will not disappear. What will change is the form it takes. Likely alternatives include:
- performance bonds, particularly for larger work packages;
- retention bonds, replacing a cash deduction with third-party security;
- parent company guarantees;
- escrow or project-bank-account arrangements;
- improved quality assurance and defects-management processes; and
- more rigorous use of contractual set-off and pay-less notice rights
There will also be a pricing effect. Cash retention is simple and cost-free for the payer; bonds and guarantees are not. Some contractors and employers will seek to pass the cost of replacement security down the chain, while suppliers may price improved cash flow into their tenders.
The challenge for the market will be proportionality. If a small subcontractor must procure expensive security to win work, the reform risks exchanging one cash-flow obstacle for another.
What should the market do now?
This is still a Bill, and the commencement date would be set later by regulations. But the direction is clear: the Government intends cash retention to cease being a standard feature of construction contracting.
Employers, contractors, funders and standard-form providers should use the proposed transition to review their approach now:
- audit retention provisions and related release mechanisms;
- decide what security is genuinely required;
- develop proportionate alternatives for different tiers of the supply chain; and
- strengthen payment, quality and defects-management procedures.
One of the main ways in which employers/main contractors can seek to mitigate defect risk is by doing away the snagging list issued at PC approach. Rather than allowing practical completion to take place with a huge snagging list triggering half retention release, parties are more likely to adopt a “zero defects” approach with a carefully drafted amendment to what practical completion requires as a condition precedent.
Retention may not disappear overnight due to the fact that there will be a 2- 3 year transitional period, but the current Bill provides a defined route away from it – and leaves the industry with a relatively short period in which to build workable alternatives.
If you have any questions or queries regarding the current position, please contact Mark Christie, partner in the construction team, by submitting an online form or calling 0345 209 1000.
Posted:
