Publication - Research and analysis

Cash retention under construction contracts: consultation analysis

Published: 5 Nov 2020
From:
Director-General Economy
Directorate:
Chief Economist Directorate
Part of:
Public sector, Research
ISBN:
9781800042780

Findings of a public consultation on the practice of cash retention in public and private sector construction contracts in Scotland and to gather views on the findings of the supporting documentation.

47 page PDF

932.6 kB

47 page PDF

932.6 kB

Contents
Cash retention under construction contracts: consultation analysis
Annex D: Supporting Reasons Given for Agreeing / Disagreeing with Pye Tait Recommendation

47 page PDF

932.6 kB

Annex D: Supporting Reasons Given for Agreeing / Disagreeing with Pye Tait Recommendation 

The recommendation made within the Pye Tait research is - "That action should be taken to create a fairer, more neutral and more protected approach to the practice of retentions" Do you agree with this recommendation? 

Respondents that answered YES:

"A legal requirement that retention money be deposited in a similar fashion to tenant deposits, I suppose a similar end might be achieved by use of Escrow.  On short projects this may also serve to discourage the practice of retention altogether as the administration involved may come to be seen as disproportionate to the benefit."

"Retention should never equate to more than the final profit margin so there should be a cap on the % with company guarantees used over and above. There needs to be clearly identified a neutral party who can resolve disputes at a low cost. Currently if the main contractor refuses to pay part of a retention, there is usually no point pursuing it as the costs outweigh the benefit. this leaves smaller suppliers doing works for cost at best. Retention needs to be held by another party other than the main contractor with definite deadlines set and adhered to."

"Retention not to be deducted from small works agreements or contracts under certain value as the cost of recovery is greater than the sum held by the contractor, retention is treated largely as additional discount. Sub-contractors are bound by contract under defects liability period to rectify works."

"Retention periods should not be more than one year, on large contracts the value of retention should not be percentage based it should be limited."

"All monies should be held in a neutral position from the start until the end of the defects period. No-one should have access to these funds unless it is payment for work rendered on that project. Retention should be released as and when due to each sub-contractor. If 1 sub-contractor fails to adhere to their contract it should not affect the others. Once works are passed the retention should be paid and not held until everyone has met it."

"That all contracts should state that retention release is dependent on the completion by the subcontractor and that final retention should be issued 12 months after this date or have retention bonds, where the subcontractor can include this cost within their prelims or have no retention at all, but a legal statement needs to be signed at the beginning of the project, that the subcontractor will attend to any defects of their own making only. At the end of the day a company is only as good as their last project and if they do not deal with defects it could lead to a bad rep."

"By segregating retention monies in a scheme similar to the tenants' deposit scheme. This would be similar to PBAs where progress payments are ring fenced in a separate bank account."

"By having a statutory obligation to place cash retentions in a retention deposit scheme."

"The "Landlord" escrow account model where Contractors and Sub-Contractors retention fund will be held in trust. This will eliminate the retention (other people's money) being used by the higher tier party as working capital, thereby incentivising sharp practice to avoid payment. Also, where retention is being used as working capital, it can artificially improve (even on a short term basis) a trading entity's cash position, allowing Parties to trade precariously beyond that which their actual business ought to be."

"By having a statutory obligation to place cash retentions in a retention deposit scheme."

"Separate bank account for all contract funds overseen by client or clients representative not main contractor. Funds should be released on approval by M.C. with any discrepancies firstly decided by clients representative and then on to Adjudication if warranted."

"Any contractor or sub-contractor or any job should be enrolled in a construction industry scheme. These schemes would normally have a guarantee scheme within them. If either of these contractors fails to fulfil their obligation then their own scheme should be informed and the company potentially disciplined or struck off. The guarantee scheme then should be involved to cope with fulfilling the obligation. It would definitely get rid of an awful lot of fly by night companies and hopefully leave the good and compliant companies with a smoother way to fulfil all their obligations/contracts."

"By segregating retention monies in a scheme similar to tenants' deposit schemes, eg PBA's, where progress payments are ring-fenced in a separate bank account."

"Independent holder of the retention funds."

"By segregating retention monies within a scheme similar to the tenants deposit scheme s Where progress payments and final payment is ring-fenced ."

"Legal clause entered into all contracts where the employer must automatically release retention monies to contractor once their term/obligations are complete."

"Retention should not be applied automatically on every job regardless of best value.

"Retention should only be applied where it would provide a realistic incentive to return to fix defects. There should be a minimum contract value amount before retention is applied. For example a retention deduction of £3 on a £60 job provides no value and increases admin costs for both small/sub-contractor and main contractor in admin and process costs. Main contractors should be required to have a system to release retentions monies after 12 months without small/sub-contractors needing to apply for retention payments."

"I think the needs of all parties concerned require to be addressed. Each party involved within the process requires more understanding from the various parties involved i.e. the client should understand how this would impact not just the contractor or sub-contractor but also the sub-contractor's sub-contractor/supplier etc. The chain of how retention impacts each party should be understood and everyone's concerns listened to."

"Either doing away with cash retentions or setting earlier retention release dates linked to the individual contractors sectional completion of their element of the works. As a specialist subcontractor working at the very start of a project particle completion may be some 2 - 3 years post completion of our works. There should also be an option for a third party professional to sign off the work triggering a retention. Any monies held in rent ions should be held in escrow"

"As per my answer to 4a, retention monies should be kept in a retention deposit scheme. The tenancy deposit schemes operating for tenants' are a working example of how such a scheme would operate. Ultimately the preference of FMB's membership is for retentions to be abolished in the medium to longer term. Introducing a retention deposit scheme would act as an immediate measure to address the issue. This would be part of a roadmap to remove retentions. The key point though, is that the status quo on current retentions practice must end."

"1: Retentions should only be on contracts over a certain value. 2: The principal contractor should be made to pay the subcontractor, providing the s/c has no defects, on an agreed date prior to the works commencing. There are too many principal contractors not paying the supply chain until they receive their retentions monies. This would encourage the principal contractor to complete defects quicker. 3: Retention monies should be held in a neutral bank account for protection in the event a principal contractor enters liquidation/administration."

"Stage releases & realistic caps being put in place. Earlier release after final completion."

"The process would need to be laid down in legislation.  Currently we can be asked by Clients to provide both a retention amount and a performance bond.  We do not see why this should be necessary to have both. It can be very difficult obtaining release of retention as time moves on and sites are sold by Clients to a third party. If monies were held in an escrow account, similar to a rental tenancy deposit scheme, there would be greater legal recourse for Contractors."

"The general Transport Scotland consensus, is that there needs to be some kind of assurance in place, but it is felt that the current system is only partially effective and retentions may not be the best form of assurance.  That being said, until an alternative form of assurance is put in place it would be advisable to retain retentions. In situations where retentions are not able to be used, other methods of assurance such as retention bonds, PCGs and escrow stakeholder accounts could be used. PCGs are often necessary with main contractors otherwise there is potential for defects not being repaired. Further, sometimes  fixing serious issues can exceed the value of retentions held and some defects can arise after the release of retentions. Winding up a subsidiary company should not be an option to escape fixing defects. Escrow accounts offer the opportunity for a fairer mechanism for retention release (managed/adjudicated by an independent body) for  subcontracts who cannot offer a PCG although it depends on the details of the agreement. The current contract provision adopted by Transport Scotland is the use of retention bonds, as an alternative to retention, although uptake is often varied. While PCGs are already adopted under our contracts, these are where the Contractor has had to rely on an entity to demonstrate the requisite economic and financial standing at procurement stage and are applied where a Contractor does not fulfil their obligations under the contract."

Respondents that answered NO:

"No action - I'm happy with current system of retention."

"Ban the practice of retention."

"No action - I'm happy with current system of retention."

"Ban the practice of retention" (x8)


Contact

Email: covid.construction@gov.scot