Jonathan Hyndman, Partner at Rosling King, a UK based law firm, wrote a report on the current status of retentions. Cash retentions are very common in the construction industry, with approximately £3 billion of outstanding retentions in the UK at any one time. Developers enjoy having an element of protection against faults arising during the rectification period and late completion given by the deduction and the retention of a percentage of the value of the works from interim payments due to the contractor during the construction phase.
Contractors have been encouraged to price the risk of their retention not being released into the contract sum because of the persistent failures to release them on time and sometimes at all as a result of simple breach of contract or the insolvency of the party holding the retention.
The Construction (Retention Deposit Schemes) Bill, introduced as a Private Members’ Bill, was read on the 9th of January in the House of Commons for the first time, following the Carillion’s collapse which brought into perspective the importance of the proposed legislation.
What Bill will do is it will introduce a secondary legislation that requires cash retentions to be paid into a Government approved scheme. This means that even though the party to whom the retention is due would still be encouraged to complete work on time and to fix defects, in the event of the retention holder’s insolvency, the retention would be in a Government approved scheme and would be available for downstream release before any creditor distribution.
The construction industry has showed its support for the proposal, which is needed in relation to deposits paid by tenants of shorthold tenancies to landlords for example. However, for Carillion’s subcontractors and suppliers, this protection of retentions against upstream insolvency in the construction industry will come too late.