a consultation on the reform\u00a0of retentions<\/a>, which examined two options:<\/p>\n mandating the protection of cash retentions, either through segregating the retained sums in a separate bank account, or through a security instrument, such as a bond or insurance.\u00a0<\/p>\n
Following the announcement in March, it is clear that the government has chosen to introduce an outright ban.<\/p>\n
This approach has the virtue of simplicity in comparison with the\u00a0option\u00a0for protecting retentions. However, retentions also currently serve\u00a0an important role\u00a0in securing performance. Consequently, a\u00a0blanket ban on cash retentions could give rise to a number of unintended consequences.<\/p>\n
Loopholes\u00a0and alternatives to cash retentions<\/p>\n
The precise scope and wording of the proposed ban on retentions is not clear from the government\u2019s announcement. In that context, there is an overt risk that any ban on retentions could be circumvented by parties making contractual arrangements that achieve a similar result to a cash retention.\u00a0<\/p>\n
The obvious example would be milestone payments, stage payments or works packages being \u201cback loaded\u201d so that more of the contract price is paid towards the end of a project.\u00a0Parties may also try to describe what is, in effect, a retention as something different in order to avoid the precise wording of the ban, or otherwise \u201chide\u201d what is effectively a retention arrangement within the contractual agreement to try to circumvent the ban.<\/p>\n
There is also the question whether the retention ban will extend to a scenario where employers pay retention amounts into a project bank account. That could mitigate some of the insolvency risk while also keeping contractors incentivised\u00a0regarding\u00a0defects.\u00a0However,\u00a0this would not address the cashflow issues that the government\u2019s proposed changes are intended to resolve, and so it seems\u00a0likely such\u00a0a scenario would be caught by the ban.\u00a0\u00a0<\/p>\n
In any event, project bank accounts\u00a0haven\u2019t\u00a0proved too popular across the industry due to the additional costs and administration required to set them up and\u00a0operate\u00a0them.\u00a0<\/p>\n
Contractors could also be required by employers to hold an equivalent amount to a retention in an escrow arrangement until practical completion or until the end of the\u00a0defects\u00a0rectification period.\u00a0<\/p>\n
Retention bonds\u00a0are currently available in the surety market as an alternative to cash retentions.\u00a0However,\u00a0it seems doubtful that there would be capacity in the surety market to support retention bonds being put in place across the whole industry. Retention bonds would also attract a material cost that would\u00a0presumably be\u00a0passed on to the cost of the project.<\/p>\n
Also, if retention bonds or other security instruments are seen as the mitigation of the retention ban by employers and SMEs find it more difficult than larger companies to access those kinds of performance security \u2013 either through not having as much credit with the sureties or the necessary access to the surety market \u2013 or because of the cost of the performance security if they are not able to pass on that cost to the project \u2013 it is possible that some SMEs may find it more difficult to win contracts following the reforms.\u00a0<\/p>\n
If the\u00a0late payment\u00a0reforms only apply to SMEs, main contractors may also find themselves in a position where they need to pay an SME subcontractor earlier than they receive payment from their employer, which again may\u00a0impact\u00a0main contractors\u2019 enthusiasm for engaging SMEs in future.\u00a0<\/p>\n
Other unintended consequences\u00a0<\/p>\n
While they may have the potential to be used unfairly, cash retentions also play\u00a0an important role\u00a0in securing performance obligations. The government will need to\u00a0carefully\u00a0consider how best to mitigate\u00a0the risk of any potential unintended or negative consequences,\u00a0which include:\u00a0<\/p>\n
contractor valuations of interim payments are likely to be challenged more robustly by employers and project managers;
\n incentivisation for contractors to rectify defects and\u00a0comply with\u00a0other obligations post-practical completion will be\u00a0impacted;
\n the ban could result in more tension\u00a0during the course of\u00a0projects, as there is likely to be more focus on raising issues with quality and defects during the carrying out of the works;<\/p>\n
quality issues during the project may be more fiercely contested earlier in\u00a0projects if\u00a0employers and project managers will be concerned there will not be a sufficient incentive for a contractor to rectify defects\u00a0later on;<\/p>\n
the absence of a post-practical completion retention could also result in tighter approaches and more prescriptive requirements around practical completion;<\/p>\n
the unavailability of cash retention is also likely to have a commercial impact on the approach to funding,\u00a0procuring\u00a0and pricing projects and the risk allocation under construction contracts and other agreements \u2013 such as development agreements \u2013 in that context;<\/p>\n
the government\u2019s proposed reforms regarding late payment are targeted at the protection of SMEs from cashflow issues and insolvency risk that arise from cash retentions on a project. However, if employers or main contractors on projects have a less robust performance security position because of the cash retention ban, it may become more difficult for SMEs to win work in the first place if they are seen as too much of an insolvency risk themselves.\u00a0\u00a0<\/p>\n
These issues\u00a0have the potential to\u00a0result in a more adversarial approach and less collaborative behaviours on projects following a ban on retentions.<\/p>\n
Consultation<\/p>\n
The government has acknowledged that the ambitious nature of its proposal to ban cash retentions requires further\u00a0consultation with interested parties on the impact of the proposed ban before taking a final decision on implementation.\u00a0<\/p>\n
In particular, the\u00a0government recognises the need to address concerns around build quality and surety\u00a0alternatives. It\u00a0says it is also committed to working with the Construction Leadership Council and construction clients\u00a0to develop practical approaches to minimising defects, as well as working with the financial services sector to identify ways of developing the surety market for the construction sector.\u00a0<\/p>\n
It will be interesting to see whether this further consultation process results in any changes to the government\u2019s proposals, to take account of any of the issues\u00a0identified\u00a0above.\u00a0<\/p>\n
Impact on employers and wider industry<\/p>\n
The industry has understood for a long time that there are material issues with cash retentions, both in principle and\u00a0the way that they are treated in practice by some employers. Many in the industry will see the proposed ban as being welcome in protecting the cashflow at all levels of the supply\u00a0chain and\u00a0also protecting those with the smallest shoulders from carrying the burden of upstream insolvency risk.\u00a0\u00a0<\/p>\n
Equally, however, retentions have served an important purpose in the industry particularly around incentivising rectification of defects after practical completion and protecting the interests of employers and end users in respect of build quality and other aspects of contractor performance.\u00a0While it is certainly not a perfect solution to the matters it is addressing, it is at least a simple and functional one that is easy to understand and\u00a0operate.\u00a0\u00a0<\/p>\n
As and when the retention ban is implemented, whether or not it is a net benefit to the industry as a whole is likely to depend on how the industry reacts and adapts to procuring and managing projects without the option of a cash retention, as well as the availability of accessible and affordable alternatives to a cash retention that still protect the legitimate interests of employers, funders and end users.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"
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