Retention Deposits in Construction Projects

11/06/2018

Following on from the collapse of Carillion a draft Bill proposing amendments to the current rules on protecting retention deposits in construction contracts has been published.

Retention is a percentage of the amount due for payment to a contractor or sub-contractor that is retained by the client to ensure all work is completed and defects made good. However, for some contractors this can cause cash flow problems.

The exact details remain unclear, however it is understood that the draft Construction (Retention Deposit Schemes) Bill proposes the introduction of a new requirement that retention money must be deposited in a retention deposit scheme.

The aim is to safeguard cash retentions, which are held in connection with construction contracts, and to provide security so that they are protected against insolvencies of parties up the supply chain. The Bill is also designed to facilitate the resolution of disputes which arise in connection with such retentions.

Under the proposed rules, any clause in a construction contract which allows the deduction of cash retentions would be ineffective if, upon withholding the retention, the money is not placed into a retention deposit scheme.

These proposals are welcome, although the detail of the disputes procedure would need to be simple and cost-effective for it to be of meaningful assistance.

Perhaps most surprisingly, the new scheme is also intended to apply to existing contracts, meaning that if any money already withheld after new rules come into force were not placed in a retention deposit scheme, there would be a requirement to refund the full retention. This would undoubtedly create a considerable administrative burden in reviewing all existing contracts and setting up the scheme on current and often long-running projects.

The Bill is currently working its way through the legislative process with the second reading due to take place on 15 June 2018. The Bill will be debated and either agreed or rejected in principle. It does however have substantial backing from MPs and construction trade bodies.

If the current provisions of the Bill do become law in England and Wales, contractors at all levels of the supply chain will need to understand their rights and obligations in relation to the scheme and what to do if there is a dispute regarding retention monies. Failing to comply could seriously affect cash flow on projects through from practical completion to the end of the rectification period.

If you need any advice on construction and engineering; property development projects; construction contracts; or if you find yourself a party to a construction dispute, please do not hesitate to contact Karen Elder or Jessica Hancock on karen.elder@beswicks.com or jessica.hancock@beswicks.com Alternatively, phone 01782 205000.