The construction retention is open to abuse, and contractors are potentially missing out on millions of pounds of unpaid invoices. Bill Bordill, a director at Escalate partner firm Decipher, explains why.
The mood at the Mipim conference, the global property industry’s annual networking event in Cannes, earlier this year was more subdued than usual. Delegates were well aware that predictions for the UK commercial and residential property market look weak at best. Indeed, a recent survey of the housing market by the Royal Institute of Chartered Surveyors concluded that prolonged Brexit uncertainty will likely cause further damage to the sector. The outlook is gloomy, even when viewed from the south of France.
As a result of lacklustre demand, it is reasonable to assume that residential developers might need to shave their prices to encourage sales - but they will be less keen to cut their margins. Similarly, commercial developers, especially local authorities, are under huge financial pressure currently and will be looking to cut expenditure. One obvious way to save money is not to pay a construction retention.
The retention system has been a feature of the construction sector for decades, with the aim of providing clients with security against defective work or the insolvency of their construction contractors. A retention occurs when the client holds back a percentage of the payment for a construction contract. The first half of the retention is then typically released when the project completes, with the remainder following once the defects liability period on the project expires.
A recent government report found that the average construction retention was 4.8%. As this is a significant sum, the attraction of not paying it is plainly quite high. Historically, many within the property industry have accepted non-payment of the retention as ‘just something that happens’.
The question, given the challenges affecting the sector, is whether this mantra will be adopted by more organisations in the supply chain. The issue is further compounded by the collapse of Carillion last year.
While there have always been grumblings, it was not until early in 2018 that chartered surveyor and MP Peter Aldous used the Ten Minute Rule to introduce the Construction Retention Deposit Scheme Bill 2017-2019 to Parliament.
Aldous’s intervention was the first time the issue had received serious debate for many years and, regardless of the outcome, has left many contractors who are subject to the retention asking whether non or late payment is acceptable going forward.
One of the most common solutions is ensuring that the monies due in a retention are held in a separate account or even a retention bond. This is standard practice and indeed a regulatory requirement for many professions, including legal and financial services.
Physiologically, having money in a separate account works well as it is less likely to be seen by the company holding it as something that is available for working capital or even to pay bonuses. Having the monies held in a legally separate account also means that they cannot be touched should the client have financial difficulties as a result of not getting paid further up in the supply chain or even in the worst case, insolvency.
Practically, setting up a bond or separate account is simple and the mechanism for paying out can be covered in the standard contracts that you use. As this type of arrangement is established at the inception of the work, it overcomes or highlights the exposure to the company not paying.
If the client intends to pay the retention, subject to reasonable terms and conditions, then it should not have an issue with placing the money in a bond; if, on the other hand, it strongly objects, then alarm bells should ring and allow you to decide whether the payment of a retention would dictate whether you want to accept the contract.
Having better contracts is the other solution. In our experience, too many contractors simply accept the terms and conditions of the contract that they are given. Most of the contracts that we see are vague in terms of when a retention will be paid. Others fail to be explicit on what constitutes a defect. In short, most contracts are sufficiently ambiguous that a contractor needs to resort to legal action in order to clarify the situation.
Assuming you have unpaid retentions and have been unable to gain an acceptable resolution with the company that contracted you, then you will most likely need legal support - this is where Escalate can help.
To avoid payment issues our recommendation is always to carefully check who you are dealing with and walk away if necessary, even though this can be a hard decision to make.
Remember the adage that prevention really is better than cure. The best solution to issues with retentions is to address them at inception of the negotiations. Get the contracts checked and insist on setting up a bond or separate bank account.
If you have already suffered losses then don’t automatically assume the costs of recovery outweigh the benefits. For advice on recovering unpaid construction retentions, or for more information about the Escalate process, please contact us.