Retentions are a critical aspect of construction contracts in the UK, particularly in standard forms like JCT contracts. This blog explains the concept of retention, its purpose, how it operates within JCT contracts, and practical steps to recover retention monies. We also explore issues with the current retention system, reforms, and potential alternatives.
What is Retention?
Retention is a portion of payment withheld from contractors or subcontractors by the employer as security for proper completion of the works. Typically, this amount is set at 3-5% of the contract sum. The primary purpose of retention is to ensure the contractor addresses any defects identified during the defects liability period and fulfils their contractual obligations.
Retentions in Standard Form Construction Contracts
In standard construction contracts like those issued by the Joint Contracts Tribunal (JCT), retention provisions are common. The JCT contract sets out clear terms regarding how much retention will be held, how long it will be retained, and the conditions for its release. These terms provide clarity but also leave room for disputes if not carefully managed.
What Happens to Retention?
Retention is typically held in two stages:
- At Practical Completion: Half of the retention is usually released once the project reaches practical completion, signifying that the works are substantially complete.
- During the Defects Liability Period: The remaining retention is withheld until the end of the defects liability period, ensuring that the contractor rectifies any outstanding defects.
The length of the defects liability period varies but often lasts six to twelve months after practical completion.
How is Retention Processed?
The release of retention monies is tied to interim certificates issued by the contract administrator or employer’s agent. These certificates confirm the completion of work stages or the resolution of defects and authorise the release of funds. Contractors should carefully monitor these processes to ensure timely payment.
Collecting Retention Money
To collect retention owed in JCT contracts, follow these steps:
- Review the Contract Terms: Understand the conditions for retention release.
- Monitor Practical Completion: Ensure the project is certified as substantially complete.
- Address Defects Promptly: Resolve any identified defects within the defects liability period.
- Request Interim Certificates: Communicate with the contract administrator to issue certificates.
- Submit Final Accounts: Include retention in the final account submissions.
- Follow-up: Chase payment if not received within the agreed timeline.
What Are the Problems with Retention?
Retention has been criticised for its impact on contractors’ cash flow and the risk of non-payment. Small firms, in particular, face challenges when employers or main contractors withhold retention unjustly. MPs have debated abolishing retention, citing its negative effect on the construction industry’s financial health. Despite this, retention remains a deeply entrenched practice.
Understanding Why Retention May Not Be Paid
Retention payments may be withheld for several reasons:
- Unresolved Defects: Failure to address defects identified during inspections can lead to delays in payment. It is crucial for contractors to document all remedial actions taken and communicate these efforts to the employer or contract administrator. Without clear evidence of defect resolution, employers may be unwilling to release the funds.
- Disputes: Disagreements over the quality of work or whether contractual obligations have been met are common causes for withheld retention. Contractors should ensure they meet all specifications outlined in the contract and address any employer concerns promptly to avoid disputes escalating.
- Employer Insolvency: Employers going into administration or liquidation can result in retention monies becoming irrecoverable. Contractors should consider contractual safeguards, such as escrow accounts or retention bonds, to mitigate this risk.
- Administrative Delays: Poor contract management, including errors in issuing interim certificates or delays in final account submissions, can slow down the payment process. Regular follow-ups and maintaining thorough documentation can help expedite administrative approvals and prevent unnecessary delays.
What Can You Do If You Are Owed Retention Monies?
If retention remains unpaid, consider the following resolutions:
- Communicate: Raise the issue with the contract administrator or employer. Provide clear evidence, such as project reports or defect rectification documents, to support your claim and facilitate a constructive discussion.
- Negotiate: Attempt to resolve disputes amicably by proposing solutions that address both parties’ concerns. This may include agreeing to partial payments or timelines for defect resolution to speed up the process.
- Adjudication: Pursue adjudication for a legally binding decision. Adjudication is often quicker and less costly than litigation, making it a preferred route for many contractors. However, ensure your case is well-documented to increase the likelihood of a favourable outcome.
- Litigation: If necessary, consider court proceedings as a last resort. While litigation can be expensive and time-consuming, it may be the only option to recover significant amounts of retention. Prepare thoroughly by working with a solicitor to build a strong case.
- Seek Legal Advice: Consult a solicitor specialising in construction law to guide you through the complexities of retention disputes. A legal expert can help you assess your options, draft effective communications, and represent your interests during adjudication or litigation.
What Alternatives Are There to Retention?
Retention bonds are a viable alternative to traditional retention. These bonds act as a financial guarantee that the contractor will rectify defects, removing the need to withhold payment. Retention bonds are particularly beneficial for contractors, improving cash flow and reducing financial risks.
Project Bank Accounts (PBAs) offer another modern solution to retention issues. PBAs are ring-fenced accounts that ensure prompt payment to all parties involved in a construction project, including subcontractors. By depositing retention money in a PBA, the risk of employer insolvency affecting the release of funds is significantly reduced. This approach promotes transparency and financial security, making it a compelling alternative for contractors and subcontractors.
The Retention Deposit Scheme (RDS) is another proposed alternative designed to safeguard retention monies. Under this scheme, retention funds are held in a secure third-party account rather than being retained by the employer. This structure protects contractors from non-payment risks while ensuring funds are available to address defects if necessary. Although not yet widely implemented, the RDS has garnered support from industry stakeholders pushing for fairer retention practices.
What Attempts Have Been Made to Reform Retention?
Efforts to reform the retention system have been ongoing for several years, with various legislative and industry-driven initiatives aiming to address the challenges posed by retention practices. In 2017, the Construction Retention Deposit Schemes Bill was introduced to mandate deposit schemes for retentions, providing a secure framework to protect contractors against non-payment. While this bill aimed to revolutionise how retention monies were handled, it needed to gain more traction.
The following year, the Construction (Retention Deposit Schemes) Bill 2017-19 (also known as the Aldous Bill) proposed holding retention funds in trust accounts to safeguard them from misuse or employer insolvency. Despite strong support from the construction sector, the bill faced significant obstacles and failed to progress into law. By 2019, the Construction Leadership Council (CLC) recommended abolishing cash retention entirely by 2023, promoting a system that could eliminate the financial strain and risks associated with traditional retention practices.
In 2020, the government launched a consultation on retentions to explore potential changes, though resistance from certain industry stakeholders limited the impact of these discussions. However, the conversation surrounding retention reform gained renewed focus in 2023 with the introduction of the Building Safety Act. This legislation included measures to tighten financial regulations, indirectly addressing retention issues by promoting accountability and security.
Most recently, in 2024, debates within the industry reignited calls for reform, with stakeholders advocating for robust protections to ensure retention monies are fairly managed and distributed. These ongoing discussions highlight the persistent challenges in achieving a consensus on the future of retention practices.
We Can Help
Retention plays a significant role in JCT contracts but comes with challenges that can impact contractors and subcontractors. Understanding how retention works, why it may not be paid, and what actions to take can help contractors navigate these issues effectively. Legal advice and exploring alternatives like retention bonds can also mitigate risks. If you need assistance with retention disputes or other construction law matters, contact us for expert guidance.
