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30 Nov 20211 minute read

Lord Aberdare speaks out against retentions

ECAtoday
Lord Aberdare speaks out against retentions

Lord Aberdare, sponsor of a Bill to abolish payment retentions, has written in The Construction Index about the injustice of payment retentions, the rationale behind the Bill, and what needs to happen for the Bill to become a success.

Below is an excerpt of Lord Aberdare's column, which can be read in full here.

Retentions are amounts withheld from payments which would otherwise be due under construction contracts as security against contractual non-performance by the party to which they are owed.  They have a damaging effect on the construction industry.  They restrict the ability of the firms from which they are withheld, mainly small and medium-sized enterprises (SMEs), to innovate, to invest, to train staff, to take on apprentices, to grow and sometimes even to survive.  The system is fundamentally unfair to such small businesses, which is what first led me to take an interest in it, having had experience of the crucial importance of cashflow and prompt payment when running small businesses myself.

It is estimated that some £4.5b annually is taken out of the economy through outstanding retentions, while around £1m per working day is wholly lost to smaller construction businesses through insolvencies of upstream contractors who have withheld funds due to them.  In 2018 about £10.5bn of the construction sector’s overall annual turnover of £220bn was estimated to be held in retentions, with unpaid retentions amounting to £7.8bn over the previous three years.  The collapse of Carillion alone resulted in the loss of hundreds of millions of pounds of such retained funds, forcing a number of small firms into bankruptcy.

There are several concerns relating to retentions.  The most significant are that retentions owed to subcontractors are sometimes never paid at all, and that the funds held are not ring-fenced or protected in any way, so that if the higher-level contractor holding them becomes insolvent they are lost, and again the firms to which they are owed receive nothing.  Inevitably this leads to prices quoted for work being inflated to allow for the risk of retentions being lost; nor can firms borrow money against retentions owed to them, because of the uncertainty of their being paid.  All of this reinforces a lack of trust and cooperation between contractors at different tiers, one of the most damaging consequences being the implied perception that the contractor engaged to do the works is not up to the task.

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