Contractors: do you find out when your retention will be paid before entering into a construction contract? Do you make sure that your retention is paid when it has become due?
What is the purpose of retention?
Retention is a percentage (usually up to 5% of the contract sum) of each payment made under a construction contract which is withheld in order to try and ensure that works under the construction contract are completed to the required standard. Retention is a ‘pot of money’ from which the employer can, amongst other things, deduct liquidated damages for delay, make deductions for defects which have not been rectified or use as a deterrent to ensure that the contractor completes the project on time or rectifies any outstanding defects.
When should retention be released?
This depends on the wording of the construction contract but it is common for a construction contract to provide that half of the retention be paid upon practical completion of the works and the remaining half be paid on the making good of any and all defects in the works. Retention release can, of course, be linked to other ‘trigger events’ agreed by the parties and therefore the retention terms of any construction contract should be checked carefully.
Common problems with retention
Unfortunately, it is common in the industry for retention to not be released on time or, in some cases, not released at all without having to fight for it; this can have a significant impact on a business’ cash flow and in the most extreme cases can lead to insolvency.
The UK Government is currently carrying out a consultation surrounding the practice of retention under construction contracts which has, in part, arisen out of the practice of late release/no-release of retention and the effect that it is having on businesses and the industry as a whole; whilst any change to legislation takes time, there does appear to be some movement towards properly regulating retention.
We regularly see construction contracts which stipulate that the second half of retention will not be paid for a very long time after all defects have been rectified; for example, 12 months from the certificate of making good defects (if the defect rectification period is 12 months you will not be entitled to payment of retention for a minimum of two years from completion of the project); this is one way that your employer can link payment of retention to obligations and/or payments under other contracts and bypass the Construction Act prohibitions mentioned below.
The reality is that recovering retention is not at the forefront of most businesses’ minds as by the time it has become due focus and resource has turned to other projects, this means that many construction companies are losing out on thousands of pounds of unrecovered retention – this is money that you have already earned through your hard work but have not been paid.
Did you know that some retention payment clauses are prohibited?
The Housing Grants, Construction & Regeneration Act 1996 (as amended) known as the “Construction Act” in most cases prohibits clauses which make payment of retention conditional on:
- the performance of obligations under another contract;
- a decision by any person as to whether obligations under another contract have been performed; and
- the payer receiving payment from a third party.
The Construction Act provides that such clauses will be ineffective and will be replaced with the “relevant provisions” of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (“the Scheme”).
So, for example, a clause which states that the second half of retention will not be due under a sub-contract until defects have been made good under the main contract will not be effective and will be replaced by the relevant provisions of The Scheme. The most likely result of this is that your retention money will become due for payment much earlier than your employer expected. Our team of construction law experts can help you find out whether this applies to you.
How can you try and avoid problems with recovering retention?
Unless your construction contract does not require retention, in reality, there is nothing you can do which will guarantee that you will be paid your retention on time, as it is the same as an unpaid invoice. There are however actions which you can, and should, take to try and avoid problems and/or speed up the process of payment and these include:
- carefully checking the terms of your construction contract, or asking one of our construction law experts to check it for you, before entering into the construction contract; and
- serving the appropriate notices on your employer which are required by your construction contract and/or the Construction Act.
What can you do if your retention has not been paid?
If the payment date of your retention has passed without payment being made then contact one of our construction law experts who will be able to explain your options; it may be possible that the dispute can be referred to adjudication via our ‘no win no fee’ Damages Based Agreements which lends itself perfectly to helping recover your outstanding retentions as you only pay us if we win therefore the added financial burden to your business is significantly reduced.
If you would like to discuss how to protect your cash flow through improved recovery of retention, then please contact Andrew Perry, Partner and Head of Construction & Engineering, on 01332 226 488 / 07733 367 597 or firstname.lastname@example.org.