Retention - Third time lucky in attempt to abolish retention?

As a Private Members’ Bill is presented to Parliament calling for retention within construction contracts to be abolished, we look at what retention is, the issues it can cause, what the Bill provides, and what the alternatives might be.

What is retention?

Most building contracts and sub-contracts will contain a retention clause in them. The effect of a retention clause is that it allows an employer to hold back a percentage from payments otherwise due to the contractor. Retentions can also be used as a way of ensuring certain documentation is provided, such as performance bonds, parent company guarantees, and collateral warranties.

Commonly, retention is 3% or 5% of the interim payment due, with half of the retention being released after practical completion and the other half being released after the issue of the certificate of making good defects.

From an employer’s perspective, retentions perform a number of important functions, including reducing the risk that a contractor has been overpaid should they become insolvent during the works, providing for an amount of money that is not paid to the contractor that is available to apply to the additional costs of employing a third party contractor to complete the relevant works should the contractor become insolvent during the project, and providing a sum of money after practical completion that is only available to the contractor if it returns to site to rectify any defects in its works (and that can be used to pay a third party contractor if the original contractor fails to return to rectify these defects).

What are the potential issues with retention?

The use of retention arguably puts the contractor in a disadvantageous position and can cause them cashflow problems, particularly if the retention monies are unfairly held on to for too long. For example, in the case of DR Jones Yeovil Ltd v Stepping Stone Group Ltd, the contractor was still waiting for retention monies to be released by an employer three years after they had made good defects.

Whilst ‘pay when paid’ clauses are generally prohibited by the Construction Act 1996, this may be the reality for subcontractors where a main contractor is not willing to release their retention as a result of retention monies held back by an employer.

It is therefore often the smaller subcontractors and suppliers further down the contractual chain that end up bearing the cost of the retention being withheld. Retentions can also be difficult to extract from employers at the end of the project. If an employer raises a potentially weak counterclaim against that retention, it may not be worth the time and cost of fighting that counterclaim so contractors end up accepting that the retention is not paid, or accepting a deal where only a proportion of the retention is paid at a level lower than what the contractor may regard as its true entitlement.

Likewise, if the employer becomes insolvent retention monies will not necessarily be ringfenced and therefore may be paid to other creditors instead of being released to the contractor. For example, following the collapse of Carillion in 2018 it was discovered that the company was holding approximately £800 million in retention monies belonging to subcontractors. The JCT contracts reflect the concept that retention monies should be held on trust and that the employer can be requested by the contractor to set these monies aside in a separate account. However, these terms are often amended so that the employer owes no fiduciary duty to the contractor and to remove any obligation on the employer to hold retention sums in a separate account.