What are the cash retentions in the construction industry?
Retention is a contractual practice originally introduced provide security against defective work or the insolvency of construction firms. It consists of the employing party under a construction contract holding a percentage (typically 5%) of the amount due for payment. It is customary that the first half is released at project completion and that the other half is released following the expiry of a defects liability period (typically 12 to 24 months) for the project.
The retention system has featured in the construction sector for over 100 years. The majority of construction contracts include provision for retention. It can be deducted at each level of the supply chain. Research undertaken by the then Department of Business, Innovation and Skills to support Construction 2025 and the Construction Leadership Council , concluded that, on a typical project, to have 50-70 suppliers and sub-contractors at tier 2 is not uncommon and that the actual delivery of the work is undertaken by a disaggregated tier 3 supply chain, and below .
… However, as well as the administrative time involved in managing and recovering retention payments, suppliers can experience a drain on working capital and inflated bad debt, compounded by issues such as overdraft fees and limited access to finance as a result.
Due to these concerns about the potential impact of the practice on small firms in the supply chain (which form over 99% of construction businesses in England ), particularly the combination of retentions and upstream insolvency, the Government has launched a review of the practice.
Source: BEIS Consultation paper on the payment of retentions in the Construction Industry (October 2017)
In this section you will find:
- Guidance for companies regarding cash retentions
- The latest on Government policy for retentions
- Our campaign on retentions
- Briefing on Cash Retentions and possible solutions