Updated: Nov 21, 2021
It’s time to outlaw cash retentions, so we can find an honest way to deliver a quality product, without hurting anyone. Here we share two significant outputs from the UK relating to retention reform…
Outlaw Retentions in the Scottish Construction Industry
Selected key points from the Pye Tait Report 2019 [NZBE Link]
A significant proportion of all withheld [retention] money (around 13%) is never repaid even after the end of the defects-liability period.
Poor cashflow is a major reason for construction companies going out of business and there is some evidence that unpredictability in the retention system can be an important drag on planning in smaller businesses. If there is reason to doubt whether monies will ever be repaid this can have serious implications for the viability of some companies.
Some 65% of those who are subject to retentions say that it acts as an inhibitor on their business growth. This is consistent with the view from qualitative feedback that retentions money is needed to grow a company. This view is not held by clients and main contractors who believe that the retention system enhances business growth.
A proportion of construction companies actively avoid work carrying retentions. They regard the system as too risky, and burdensome in administration, alongside the perception that the system is abused, or at least open to abuse, by clients and main contractors.
And a summary of their recommendations
A requirement for retentions to be held in a protected and separate location would meet almost all of the serious criticisms of the current retention system. [In the alternative], we would recommend a standard approach which requires performance bonds and outlaw retentions in construction projects.
The UK Roadmap to Zero Retentions 2023
CLC Statement Endorsing The Build UK Retentions Roadmap Dec 2019
Fair and transparent payment practices are essential for a successful construction industry, but the practice of cash retentions is problematic for all parties in the supply chain. That is why Build UK and its members support the industry ambition to move to zero retentions by no later than 2025. To achieve this, we are implementing a Roadmap to Zero Retentions with milestones to show that progress is being made.
Challenges To Delivering The Roadmap
Achieving agreed quality and specification and lack of consistency in the rectification of defects.
Providing security when working with a supply chain where there is not an established relationship.
A perceived lack of viable alternatives to retentions that provide similar levels of security.
Ensuring that any use of cash retentions until 2023 and other forms of security are implemented ‘back to back’ through the supply chain to prevent any one party bearing the financial impact.
Intended Outcomes & Benefits
Adoption and implementation of the Build UK roadmap by the construction supply chain to achieve wide scale change across the industry.
Improved quality of completed works on construction projects, and increased assurance that any defects that do occur will be rectified appropriately, without the threat of unfair payment.
An increase in working capital within the supply chain to support investment and growth.
Increased collaboration and transparency in the construction industry, ensuring that any forms of security used against defects are appropriate and proportionate.
Government recognition that the industry is stepping up to deliver change on this key issue and support for implementation of the roadmap within public sector procurement.
A world without cash retentions means…
There will either be no retentions or there will be a bond in lieu of retentions. A bond will be backed by the assets of the subcontractor or contractor issuing the bond. This will restrict the undercapitalised subcontractor or contractor from entering the market. That has to be a good thing. Anyone can sign onto a contact with cash retentions. Those who can provide a bond, will charge for the use of the capital in their price, and the client will pay, if they insist on a bond. Everything has a cost. When you only have well capitalised subcontractors or contractors, you do not need a bond either, except to expose the pretenders at tender time.
Cash retentions is an addictive cashflow stimulant, with dangerous side effects on the quality of the work delivered to our clients, and it worsens the length and depth of liquidations in our industry. It is time to raise our performance standards and minimise the injury we inflict on ourselves by NOT allowing this financial madness called cash retentions to continue. It’s time to outlaw cash retentions, so we can find an honest way to deliver a quality product, without hurting anyone.
“Celebrating 50 years of New Zealand Building Economist 1972 to 2021”
By Matthew Ensoll
Editor New Zealand Building Economist.