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Legal considerations for the Construction Industry

The Construction (Retention Deposit Schemes) Bill 2017-19 – (the “Bill”) to make provision about protecting retention in connection with construction contracts.

Notwithstanding overwhelming support, the second reading of the Bill has been pushed back yet again, to 22 March 2019.

The proposed Bill will amend the Housing Grants, Construction and Regeneration Act (“The Construction Act”).

The term “retention” refers to the practice of deducting a percentage (usually 3%-5%) of the payments certified as due under a construction contract. Half of the retention is typically released upon practical completion, with the remaining half released upon certification of making good at the end of the rectification period (usually 12 months).  In theory, retention provides security to the employer / contractor (payer) against the risk that the contractor / subcontractor (payee) will not complete their works.

The practice of deducting and withholding retention has long been criticised, and likely more so with recent reported events concerning insolvencies. It is not unusual to hear that retention is released late or not at all; offset against spurious defect claims; lost to upstream insolvencies; or blamed on “that person” no longer with company.

Often, not exclusively, those most likely to suffer from non-payment of retention are the sub-contractors further down the supply chain and just to highlight the point at the time of its liquidation Carillion was estimated to have been withholding £800 million in retention (not earning interest or contributing to a bottom line of course).

The Bill is aimed at protecting retention withheld under construction contracts through the introduction of amendments to the Construction Act.

The amendments to section 111 of the Construction Act would mean that:

  • under a new section 111A, the Secretary of State (and Welsh and Scottish Ministers), is to create a third-party trust scheme to retain and safeguard the retention on behalf of the payer.
  • under a new section 111B, retention clauses in construction contracts will only be valid if:
  • the retention is paid into a special deposit scheme;
  • prior to the first withholding, the payer notifies the payee of the scheme administrator’s details; and
  • the payer notifies the scheme administrator of the payee’s details.

Should the retention not be placed into an approved scheme, the payer will be required to refund the retention to the payee within seven working days.

The Bill’s requirement to place the retention into an approved scheme is intended to apply to construction contracts agreed prior to the passing of the Bill, which may in itself cause a payer problems if it does not in fact hold the retention in ready cash itself, for instance where a payer is funded and funding the construction, not the retention.

In the event that this Bill is passed and the Construction Act is duly amended, retention will be safeguarded and held within a trust scheme. This should ensure the payee is paid in full and in a timely manner following the completion of its contract works, reducing the need for legal action to secure payment from payers.

An alternative might be to do away with retention altogether, although payers may not be happy to give up its most common form of security in construction projects – we have yet to see events unfold with recent insolvencies and the impact down the supply chain with unpaid invoices and retention for work done and completed.

For more information, contact

Guy Thomas


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