For some years, retentions have been used to assure project completion and the timely rectification of any defects. Whilst this principle is sound enough, how effective is this process and what is the risk that the money owed may never be paid at all?
In speaking to our clients, we have seen growing fears that the current system of retentions is being deliberately abused by leading players in the construction industry. One of the reasons cited is that the funds are used as part of working capital, meaning there is no real protection for the sub-contractor and no guarantee that the money will be paid at the end of the project.
As a result of various large contractors going into liquidation, leaving many subcontractors out of pocket (and sometimes out of business), the government has responded with proposed legal reforms to the way retentions are managed. In fact, there have been calls for all retentions to be abolished by 2025. This will sound extreme to some, but the basic idea is that the current system would be replaced by a more secure scheme whereby all money withheld is lodged in an approved deposit scheme.
Unfortunately, new legislation has repeatedly been delayed and so, whilst we await this much needed reform, what can be done to ease the pain of retentions and protect job profitability?
Most people would agree that one of the best solutions is to avoid getting to the point where there is any form of dispute in relation to the funds owed. Unfortunately, the point which is often missed is that this process starts long before the contract is even signed.
Preventing a dispute relies on more than good workmanship and strong lines of communication. Before any chargeable time is spent on a job, it is essential that you:
- Make sure the contract you are about to sign is robust and avoids vague terms which are open to interpretation
- Examine all terms relating to retentions and confirm the percentage to be withheld
- Negotiate the amount to be retained – even if there is no leeway to be had, there is no harm in asking the question
- Understand the potential impact unpaid retentions could have on cash flow and funding levels for other projects
Whilst we await the outcome of recent government consultations, PJE International can answer any questions you may have about retentions, as well as helping you understand what the proposed changes in legislation could mean for your business. And remember, properly risk assessing contracts before you sign them will help protect the future profitability of your business. So if you need some expert advice to help you understand the commercial risk associated with a new or existing contract just get in touch.