Is there any hope for the reform of retentions?

Lord Aberdare's Construction (Retentions Abolition) Bill had its first reading in the House of Lords on 25 October 2021.  It is not the first attempt in recent times to reform retentions, but it is the most revolutionary – it seeks to abolish them entirely.

Sir Michael Latham was critical of retentions as far back as his 1994 report “Constructing the Team” report in 1994 in which he recommended their replacement retention bonds, and that this could be underpinned by legislation.  However, that was not adopted, and the attempts to reform retentions since then have been many, and unsuccessful.

The Commons’ Trade and Industry Select Committee recommended reform in 2002, but nothing happened. Although the 2011 amendments to the Housing Grants Construction and Regeneration Act 1996 (‘HGCRA’) meant that payments to subcontractors could not be linked to payment or certification under the main contract, retentions remain a massive exercise in subcontractors subsidising contractors and employers, boosting their bottom line at the expense of subcontractors’ cash flow and future growth. In the period 2015 – 2018 it is estimated that £8 bn of cash retentions remained unpaid, and that half of businesses experienced non-payment of retention due to upstream insolvency, with the average amount lost per contract being £79,900.  However, commercial constraints – fears over loss of future jobs, and the up-front cost of recovery action - deter subcontractors from ‘rocking the boat’.    

Various recent attempts at reform include, Debbie Abrahams MP (Lab, Oldham East and Saddleworth) sought to introduce amendments to what became the Small Business, Enterprise and Employment Act 2015, requiring the use of trust funds where retentions were used, then Alan Brown MP (SNP, Kilmarnock and Loudoun), a former civil engineer, introduced the Construction Industry (Protection of Cash Retentions) Bill in April 2017, but the general election that year stopped that, and lastly Peter Aldous MP (Con, Waveney), a former surveyor, introduced his Ten Minute Rule Bill, the Construction (Retention Deposit Schemes) Bill 2017-19 on 9 January 2018, but Brexit's domination of parliamentary time repeatedly postponed its second reading, and the prorogation of parliament in 2019 killed it off. 

Had it succeeded, the Aldous Bill would have required all retentions into be paid into an authorised deposit scheme, not unlike the tenancy deposit schemes into which tenants’ deposits must be paid to keep them safe from unscrupulous landlords. Retentions would be ring-fenced so that they would be secure and available to be released on time.

Lord Aberdare's Bill proposes to introduce section 113A to the HGCRA, which would provide that any clause in a contract enabling a payer to withhold retentions would be unenforceable, and that when the bill comes into force all retentions must be paid over in full within 7 days.  To allow the industry to adapt, the bill says it would come into force on 1 January 2025.  It also seeks to beef up the definition of a 'construction contract' under section 104 of the HGCRA by including "…any additional contract created to have a similar effect for the purposes of withholding monies which would otherwise be due under the primary contract to provide the payer with security for the current and future performance by the payee of any or all of the [payee's] obligations under the primary contract."  This would appear to potentially render a contract for an escrow account unenforceable too if it persisted beyond practical completion.

The bill stands little chance of becoming law because it is unlikely the government would allow the necessary parliamentary time and, judging by ministers previously expressed views, it is too radical a reform.  However, if it were to become law, it would be a driver for the industry to move to alternatives by 2025, such as retention bonds or project bank accounts, and would be a very welcome development for subcontractors, and will allow them to grow their businesses.  It would also take some of the rancour out of the industry.  Arguably, Employers and Main Contractors have been able to evade paying retentions because the cost of recovery action faced by subcontractors for modest sums over many contracts means the cost-benefit ratio of taking action is a negative one because of the no recovery of costs principle applicable to adjudication.