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
Executive Summary

47 page PDF

932.6 kB

Executive Summary

Respondents

1. The consultation attracted thirty-three respondents, the majority of which were organisations: twenty-five organisations, eight individuals.

2. Most of the respondent's role in the construction sector were as 'sub-contractors' (n14), with 'client' and 'Tier 1 contractor / sub-contractor' having seven and six respondents, respectively. Only one respondent was a 'Tier 1 contractor.'

3. The majority of respondents were 'businesses that were subject to retentions' (n13), and 'business that uses / subject to retentions' (n8) ('Client who used retentions' and 'not exposed to retentions' had six respondents each.)

Section A: Supporting Documentation and the Pye Tait Report - Retentions in the Scottish Construction Industry 

4. In line with the Pye Tait report conclusion, respondents were almost in unanimous agreement (85% 'fully agreeing', 9% 'partially agreeing') that the "financial consequences for contractors and subcontractors in the event of a large organisation going into liquidation can be significant"

5. When asked whether they thought 'some form of assurance is needed in construction contracts', the response was almost unanimous: 94% agreed with this and only 6% disagreed.

6. However, when asked how 'effective do you feel the current system of retention is' there was a mixed response by respondents: 36% thought it was 'not effective at all' and only 9% thought it was 'very effective' (39% thought it was 'partially effective' and 15% thought it was 'slightly ineffective; 9% thought it was 'neither effective nor ineffective').

7. A majority of respondents thought that retentions were not 'the best form of assurance within construction contracts' (22 respondents said 'no', 11 said 'yes'), although there was no clear consensus on 'what other form of assurances' would be preferred instead.

Section B: Non-Payment of the Retention

8. A clear majority thought non-payment was a 'very significant' or 'fairly significant' issue, 58% and 24% respectively.

9. There were many reasons given for on-payment of retentions, either by those being subject to retentions or those holding retentions, including: insolvency, contractors not returning to fix defects, poor quality work, legal fees being too costly to pursue, and sub-contractors using the money as 'free banking.' 

10. Of the total value of retentions due to be released, to and by respondents, in the past 12 months, most were under £200k with a small number above this figure. Similarly, where retention money was due to respondents, most were under £100k.

11. Of the respondents that had experienced unpaid retentions (n10), on average they believed that approximately 60% of these were unjustified. 

12. When asked whether they challenged the non-payment of retention 'that occurred due to the payer citing obligations under another construction contract not being met' there was fairly even split between respondents, with ten saying they did and eight did not.

Section C: Late Payment of the Retention

13. Late payment of retentions, like non-payment, was also an issue for the majority of respondents (56% saying it was a 'very significant' and 21% fairly significant' issue).

14. A small number of respondents provided further information on reasons for late payment: they did not meet the provisions of the contract; payer cited that obligations under another construction contract had not been met; cash flow problems with holding company and; poor quality work.

15. Of the retentions paid late, the majority (n8) estimated that between 75 – 100% of these had been unjustified, with only two believing this to be 51 – 75% and three believing it between 26 – 50%.

16. For the amount of time they believed to have been unjustified, three waited between 1 – 3 months, six waited 3 – 6 months, three waited 6 – 12 months and two waited over a year.

17. The total median estimated cost of pursuing late (and ultimately unpaid) was £2,500 per respondent.

Section D: Existing Alternative Mechanisms to Retentions

18. When asked what options they thought should be 'applicable for wider use across the whole sector',[1] most respondents (42%) agreed that retentions should be held in trust, with 27% agreeing with retention bonds and 24% saying escrow stakeholder accounts.

19. Respondents were almost split when asked whether they thought it was 'important for Scotland to use the same mechanism of assurance in constructions contracts as the rest of the UK' with eleven disagreeing or partially disagreeing and twelve fully agreeing or partially agreeing. This split in support was also the case regardless of whether respondents were from organisations that worked exclusively in Scotland or those that worked across the UK.

20. The majority of respondents fully agreed or partially agreed (42% and 24% respectively) that a 'retention deposit scheme" and/or holding retentions in trust could eliminate some of the critical issues associated with retentions (notably the risk of delayed or non-payment of retention monies) and provide surety against defects'. Only 9% disagreed completely, and 6% partially disagreed.

Section E: Retention Deposit Scheme

21. Respondents were mostly in favour of the use of a retention deposit scheme that 'could be used for all contracts or only for contracts over a certain value', with 48% of respondents in favour for 'all contracts' and 30% for 'contracts over a certain value'. Only 15% were 'against its use'.

22. A slight majority of respondents (n17) disagreed that 'it is important to place a threshold on the application of any measure requiring retentions to be held in trust or ring-fenced in another way',[2] compared to those who agreed (n13). Of those respondents who did agreed, nine thought that less than £100k should be the minimum value of the total retained money (the retention) should it commence, three thought between £100k and £500k, and only one thought between £500K and £1m.

23. When asked to what extent they thought a retention deposit scheme may allow for a) a fairer approach to retentions[3] b) a more neutral approach[4] and c) a more protected approach,[5] clear majority either fully agree or partially agreed with all three statements.


Contact

Email: covid.construction@gov.scot