The government’s proposed ban of cash retentions in construction contracts is edging closer to becoming law, scheduled for 2027. Given that trajectory, it is ever more important to review and implement practical and commercial/risk management considerations now
Despite the impending legislative change, it is crucial that contracting parties are held to their obligations with effective measures in place to ensure that defective work is remedied and/or the insolvency of supply chain parties is guarded against.
A recap: The key proposed changes
The Commercial Payments Bill amends Part II of the Housing Grants, Construction & Regeneration Act 1996. The effect of those amendments ban the withholding of cash retentions in construction contracts, also encompassing “related agreements” or other side arrangements essentially comprising the effect of retention.
The rationale here appears to be the prevention of parties attempting to obviate the ban by sidestepping what is defined as a “construction contract” for the purposes of the act. It will also encompass other types of contracts more widely, as opposed to those parts which only concern “construction operations”.
There is a proposed two-year transition period to enable corresponding adjustments to be made to pricing, corresponding contract terms and procurement of alternative security methods, such as performance bonds or parent company guarantees.
Additionally, retentions operating under existing contracts would not become automatically payable. The bill allows for existing retentions to persist for a defined period, subject to an ultimate deadline for release.
An unlawful withholding of retention could mean a fine of up to 50% of the retention debt, together with mandatory statutory interest at 8% above the Bank of England base rate.
Matters have now moved on to focus on how this sea change in the construction industry will operate in practice. The government has confirmed that guidance will be produced in conjunction with the Small Business Commissioner and Construction Leadership Council.
That said, there are steps and issues which parties to construction contracts in place, being negotiated and planned would be well advised to start considering.
Forearmed is forewarned
With the proposed ban likely to require significant changes to existing contractual and risk management arrangements, parties should begin considering now how their contracts may need to adapt.
Consider the following:
- Revisions to standard form contracts and bespoke schedules of amendments both in terms of: (a) the removal of existing retention provisions; and (b) the implementation of new/updated security arrangements including to cater for new security solutions/options.
- Bespoke revisions to cater for transitional arrangements relating to existing retention provisions, including providing for release.
- How programme delays/critical path delays will impact on transitional retention arrangements.
- Enhancement of defect rectification provisions to further manage the risk of retention removal.
- Scrutiny of the legality of contractual mechanisms which may operate akin to retention provisions, such as deferred payments or payments pegged to certain project markers.
Potential trends
As the industry moves towards alternative forms of surety, we can expect the government to work with surety providers and the construction industry ahead of the bill becoming law.
The absence of retentions will likely impact related issues beyond those directly related to payment, such as the certification of completion and defects remediation. In short, and developing the rationale of the Building Safety Act, the ban on retentions is less about cash and more about the need for certified quality work. There may be therefore an increased focus on “getting things right first time”, although whether there is decreased appetite for lengthy snagging lists remains to be seen.
Parties will also have to grapple with contractual payment and notice provisions on the one hand and any sum comprising a “retention debt” as per the bill on the other. The latter appears to fall outside of the act’s notified sum provisions, meaning that the likely route to determining liability is to bring a claim for breach of contract.
As with any new legislation, judicial and adjudication determination, together with developing industry practice will inevitably follow exploring what is, and what is not compliant with the bill. One such area which looks ripe for debate is the meaning and effect of “related agreement”.
In turn, parties will have to balance the competing objectives of risk management with the avoidance of involvement in any “test cases” and their attendant legal cost. The detail will continue to evolve but preparation now will be key to navigating the new regime.
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