- Insolvency and restructuring
Partner - London. United Kingdom
Retentions are a controversial issue within the construction industry. It is common for a sum of money – often around 5% of the total value of a contract – to be retained by employers against their suppliers until the end of the project. They are viewed as an incentive for contractors to complete their works in time and defect-free, while providing a degree of security for employers against contractor insolvency. On the other hand, contractors face the risk of upstream insolvency if the retention monies are not ring-fenced and the burden of extracting payment. Research found that SMEs suffer the highest average delays in receiving their retention and more than 40% of construction businesses with experience of having retentions held from them experienced non-payment due to upstream insolvency.
The Construction (Retention Deposit Schemes) Bill 2017-2019
The Construction (Retention Deposit Schemes) Bill (the Bill), which is due for its second reading on 23 November 2018, proposes to amend the law such as to require any retention monies to be placed on deposit in an approved scheme, echoing the scheme in place for residential tenancy deposits. Similar schemes have recently been proposed in New Zealand and Australia. The collapse of Carillion and gloomy economic forecasts accompanying Brexit negotiations have contributed to a groundswell of support for the Bill, although detractors point to the inevitable increase of bureaucracy and suggest that efforts should be focussed on reducing abuse of the current system.
The Bill, in its present form, will:
As is common, the draft Bill offered little detail at the first reading stage and envisages that the arrangements for the schemes will be put in place by regulations. It is intended for operating costs to be covered by interest generated on the deposited funds but this, and the dispute resolution process, are yet to be fleshed out.
Proposals for reform in Australia
Due to inconsistencies in Security of Payment (SOP) legislation across the different jurisdictions within Australia, the Commonwealth Government commissioned a review to identify legislative best practice, and improve the protection afforded to subcontractors. Released in May 2018, the Murray Review (the Review) made 86 recommendations.
In response to the Review, the NSW Government’s draft Building and Construction Industry Security of Payment Amendment Bill 2018, proposes amendments to the Building and Construction Industry Security of Payment Act 1999, including changes to the retention money trust account arrangements.
Since 2015, head contractors in NSW projects having a value of at least A$20 million must hold retention money for subcontractors in a trust account, keep records in relation to the trust account and issue annual reports.
Although amendments to the Building and Construction Industry Security of Payment Regulation 2008 have not yet been drafted, the government proposes the following amendments to the existing requirements for retention money trust accounts:
A further period of targeted consultation is expected in the coming months.
If the proposed UK reforms are introduced, it is likely to lead to an increase in confidence amongst construction companies that they are better protected from up-stream insolvencies and that retention monies will be appropriately ring-fenced. The government may also see the reforms as an opportunity to bolster confidence in the sector as Brexit approaches. Regardless of the progress of the Bill, clients working on international projects will still need to consider whether an alternative to a cash retention may be more suitable as the reforms will only apply to projects within the jurisdiction.
Read other items in the Construction and Engineering Brief - November 2018