Cash retention under construction contracts: short life working group final report and recommendations
Final report and recommendations from short life working group on cash retention under construction contracts.
51. Our ambition is to see a significant reduction in the use of retentions in construction contracts, however we recognise the urgent need to improve current practice and deliver a fairer, and more neutral and protected approach to retentions. Our recommendations seek to deliver tangible improvements to retention practice. Our recommendations have been agreed by all members of the working group and are as follows:
- Scottish Ministers should take forward legislation that will apply to both public and private sector contracts to establish a statutory custodial Retention Deposit Scheme following development of a detailed business case
Having considered all three headline options within our remit (outright ban, RDS or an alternative form of assurance) we have unanimously agreed that this option presents the best course of action to address the issues often associated with retentions and identified in earlier research. We favour a custodial model which holds retentions payments in an independently run, protected deposit scheme for the period of the construction contract and delivers automatic payment.
- Scottish Government should publish a retention best practice policy note for contracting organisations by end January 2022 and consider, with contractors, professional bodies and the wider industry, how best to disseminate and promote compliance. This should include a move towards automatic release of retentions at the earliest opportunity unless a clear issue had been identified and an approach to, and timetable for, resolution set out. It will also provide a requirement that organisations withholding a cash retention should not;
- repay late or partially, without full and clearly articulated justification
- render it liable to claim by an upstream insolvent supply chain party
- use more than one form of assurance on construction contracts
We are very keen to have best practice guidance developed and disseminated in a way that is accessible to all contractors. This must negate bad practice. In order to ensure this is easily understood and adopted by all, the Scottish Government should take forward this work with clients, contractors and key professionals. This should result in clearly documented retention payment procedures and agreed best practice. In addition to the points raised above we believe this should also consider:
- staged payments which are linked to the completion of the particular work (i.e. a retention held against a company completing groundworks at the start of a project should not be held until the entire project has been completed)
- the need to hold only the value of retention that reflects defects outstanding
- a requirement that cash retentions should only be held for the minimum time necessary to achieve assurance of completion of the works
- no retention held on temporary works such as scaffolding which will not form part of the permanent works
- how and why retentions are released
- how we ensure compliance with the guidance
- By end January 2022 the Scottish Government should invite all contracting authorities involved with major construction projects (para 10) to publish their retention policy and monitor and report on compliance. This should be a requirement for all major projects delivered with Scottish Government finance
We believe it is important for contracting authorities to consider and clearly set out their policy on the use of retentions in construction contracts. This recommendation is intended to provide some welcome visibility and accountability on how contracting authorities approach and use cash retentions. We consider this an important step to clarify and potentially standardise the use of retentions by contracting authorities. Guidance on publication and an example that adopts the best practice guidance could be set out in the best practice policy note referenced in recommendation 2.
- Within six months of project handover (practical completion) for each major construction contract, require contracting authorities to publish their compliance with retention best practice or explain how and why they have deviated from it
This recommendation builds on recommendation number 3 and is intended to provide visibility of the approach to and practice of retention use for each major construction project. This will help to deliver accountability and highlight where best practice is applied. Scottish Government should identify where contractor's retention policy and their compliance with this is published, ensuring this is easily accessible to a wide audience. We recognise that the timeframe for reporting is likely to be before the end of the defects liability period (normally 12 months) but we do not believe this should deter early reporting of compliance with best practice.
- Scottish Government should ensure that reference to retentions and fair payment is included within the Construction Accord
We recognise that the construction sector in Scotland is undergoing significant change and modernisation. The work of this group must be considered in the context of the transformation agenda and complement the wider work that is already being undertaken. The Scottish Construction Accord, currently in development, aims to establish a dynamic collaboration and platform for the whole of the construction industry to work together more effectively to:
- meet the infrastructure delivery challenges we face as a country
- enhance the industry's positive contribution to Scotland's economy, society and environment
- deliver the change and action necessary to achieve these aims and ambition
We believe retention best practice should be recognised in that document.
- Scottish Government to work with industry to ensure retention best practice is reflected in standard construction contracts, including dispute resolution and conflict avoidance procedures and agreed payment procedures
The construction sector regularly utilises a suite of standard contracts available from organisations such as the Scottish Building Contracts Committee (SBCC). As the pan industry organisation that produces building contracts designed to meet the needs of the construction industry in Scotland SBCC produce contracts compliant with Scottish law and practice. The SLWG believe there is scope to have some of the standard clauses within these contracts reflect retentions best practice guidance and we should seek to explore that.
- Promote further consideration/implementation across the sector of the removal of retentions from contracts as demonstrated by Network Rail. This includes:
- progress payments not subject to automatic deduction as work proceeds
- the final payment adjusted to place greater emphasis on completing project closure activities such as the Health and Safety file and producing a [priced] list of patent defects
The SLWG heard evidence about the Network Rail "No Retention" policy and believe this model works well. The group felt that, while not suitable for all areas of construction, this approach could be more widely used. Explaining and promoting this model more widely with industry could form part of the commitment to engage with the sector at recommendation 8.
- Upon publication of best practice policy notes, Scottish Government and industry should host a major conference or series of webinars to focus on the promotion and implementation of retention best practice, including conflict avoidance
It is considered that this will be an important part of changing industry culture around retentions.
- Invite Government Enterprise Agencies to work with representative bodies and businesses in the construction sector to identify and deliver efficiency opportunities. This might include a feasibility study to consider implementing an approach to the management of construction project cash-flow using digital technologies such as smart contracts
We heard evidence of the fast pace of change and opportunities for the development of improved systems to deliver efficiencies realised, for example, through the use of smart contracts (para 32) and from new digital technologies. These could potentially be applied in the construction sector and support work to improve the practice of retention payments. The group were keen that the Scottish Government and its enterprise agencies, led by Scottish Enterprise, possibly working with CivTech, consider the advantages of new and innovative digital technologies and work with Business Gateway and the industry to promote and roll out products that can deliver efficiencies across the construction business base.
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