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The Need to Reform After the Carillion

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The Construction (Retention Deposit Schemes) Bill 2017-19, also known as the ‘Aldous Bill’, is expected to have its second reading in June this year. The aim of the Aldous Bill is to make provision for protecting retention monies in connection with construction contracts by amending the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act 1996”). The construction sector has some of the highest new company insolvencies per year; therefore the need to reform is significant.

Many building contracts and subcontracts allow an employer or a contractor to retain a percentage of the value of the work carried out until completion, working as an ‘insurance policy’ in case something goes wrong. The Construction Act 1996 does not expressly make provisions for retentions however, the rules contained therein apply to the payment or withholding of a retention, provided the contract is a ‘construction contract’.

According to the statistics of the Insolvency Service, in 2015 the construction sector had the highest number of new company insolvencies in England and Wales in comparison with other industries. The statistics coupled with the issues identified by the Department for Business, Energy and Industrial Strategy (BEIS) consultation, such as delays in releasing retentions, construction customers making a retention payment conditional on the performance of obligations under another contract and held retentions, only serve to support the argument for reforming the use of retentions in the construction industry.

If successful, the Aldous Bill will therefore create a mandatory retention deposit scheme. However, it is noted that the Aldous Bill lacks specificity as the same requires the Secretary of State and Welsh Ministers, by statutory instrument, to make arrangements for securing that one or more retention deposit scheme is available for the purpose of safeguarding any cash retention withheld in connection with construction contracts. Indeed, the scope of the definitions of “construction contract” and “cash retention” are wide and it remains to be seen how effective the reforms may be until the regulations put flesh on the bones of the Act.

Whilst it is rare for a Private Members’ Bill to reach the statute book, the Bill has gained support, perhaps owing to the insolvency of Carillion earlier this year which created a domino effect throughout the construction industry. According to the Building Engineering Services Association, 120 MPs have confirmed their support for new laws which would place retention monies into protection schemes.

The widespread use of retentions might exacerbate the number of construction company insolvencies further if their use is not properly reformed. It is hoped that the Aldous Bill will increase confidence in the sector by ensuring retention monies are ring-fenced and thus potentially reducing the knock-on effect of insolvencies in the future.

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BDC 314 : Mar 2024