Cash retentions under construction contracts are common practice in the construction industry. However, there is a growing concern that retentions are not being released in a timely manner, an issue that was worsened by the effects of Covid-19. As more and more companies feel the pinch from inflation and higher interest rates and as insolvencies rise, B P Collins’ construction dispute solicitors explain why it is increasingly important for clients to protect their position in respect of retentions and what action should be taken.
A retention is a percentage value of the overall payment for construction works which is held back, typically by a main contractor under a construction contract. The purpose of the retention is to act as security that the works will be completed by the sub-contractor and that any defects which may subsequently develop are remedied. If the sub-contractor does not remedy a defect, the contractor may use the retention to remedy the defect itself and notify the sub-contractor that they have used the retention money for this purpose.
Retentions are often a hotly-contested issue, providing critical protection to main contractors but leaving subcontractors vulnerable to disputes, late payment and insolvency of the main contractor. There have been several unsuccessful attempts to change the law regarding retentions in recent years, including a House of Lords Private Members Bill in 2022 and a proposed clause in the 2023 Procurement Bill. The government, while expressing a preference that their use diminishes, has appeared reluctant to legislate in the area.
Retentions in standard form construction contracts
Standard forms of contract – known as ‘JCT contracts’ – are in common use in the construction industry. The retention provisions in these standard form contracts are generally extensive. The default position under the JCT standard form of contracts is that the main contractor may retain 3% of each interim payment to the sub-contractor until practical completion of the works. However, parties are free to agree the amount of any retention, or no retention at all, as part of any commercial negotiation.
Some commentators view that a retention is held as a conditional loan, where the condition is that the retention will be repaid if either the works comply with the contract, or any defective works are remedied to ensure compliance. Others argue that the retention money is held on trust by the main contractor i.e. there is a fiduciary duty in relation to the retention funds. The JCT contracts reflect the principle that the retention is held on trust.
Release of retentions
When a main contractor should release the retention will depend entirely on what has been agreed in the parties’ contract. Under the JCT standard form contracts, the first half of the retention is paid when the project is completed, and the second half is paid following the expiration of the defects liability period.
Within the construction industry, there is a general concern that retentions are often not released in a timely manner. A government consultation published in 2020 found that unjustified late payment was a significant or very significant issue for 88% of responders. The issue has been exacerbated by the effects of Covid-19, where cash-strapped construction companies have looked to withhold the release of retentions to maintain a cash flow within their own business. When retentions are not released promptly, the unpaid party must expend time and money chasing payment, may lose the retention entirely if the main contractor becomes insolvent, and may also face an insolvency risk themselves due to the sums tied up in retentions.
What can you do if you are owed retention monies?
If a main contractor does not promptly release a retention under the terms of the contract, the sub-contractor should consider whether, under the terms of their contract, they need to serve notice on the main contractor for release of the retention. If the retention monies are still not released, and the unpaid party concludes that the retention should have been released and there is no valid payment or ‘pay less’ notice, then it may consider referring the dispute to adjudication or any other dispute resolution mechanism allowed in the contract. Our construction adjudication solicitors can help with this.
At B P Collins LLP, our construction team advises both sub-contractors and main contractors in claims concerning the release of retention monies. To get in touch, please email email@example.com or call 01753 889995.