Practical Law

For many years, parts of the construction sector have pushed for improvement of the market’s treatment of retention monies. Post-Carillion and its devastating impact on suppliers, however, matters may have reached a tipping point.

On 9 January 2018 – a few days before the construction giant’s collapse – the backbencher Peter Aldous introduced the Construction (Retention Deposit Schemes) Bill under Parliament’s Ten Minute Rule.

Given the importance of government support in mustering a majority in the House of Commons, relatively few Private Members’ Bills (PMB) become law. To this end, proponents of the “Aldous Bill”, not least the Waveney MP himself, have been busily promoting its merits within the industry and rallying support among politicians ahead of it being debated by MPs at the second reading.

The Aldous Bill

As is not uncommon, January’s first reading identified the Bill’s parameters but offered little detail. In his motion, Mr Aldous cited BEIS’ then-ongoing consultation on reforming retentions in the construction industry.

The Aldous Bill is a variation of an idea mooted by BEIS in its consultation document. The law would be changed to require any retention monies to be placed on deposit in an approved scheme, inspired by those created for residential tenancy deposits under the Housing Act 2004. Operating costs would be met by interest generated on the deposited funds, with any surplus donated to towards charities involved in construction training. Deposit schemes, Mr Aldous argued, would crack the problem of retention monies being lost through upstream insolvency or abuse.

Several key questions remained. For example:

• Which construction agreements would it relate to?
• Would it apply to Northern Ireland, as well as to Great Britain?
• How would a disagreement between the parties over whether a retention should be released be resolved?
• What form would any transition period take?
• How would it deal with retentions that had been set off against purported payee non-performance?

Save for the last query, answers came when the draft bill was published. From this, we learn that the new Act would, unsurprisingly, amend the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996) to facilitate the creation of retention deposit schemes in England, Wales and Scotland (with provision reserved for the institution of the same in Northern Ireland through an Order in Council).

The contracts covered would be “construction contracts” under section 104 of the Construction Act 1996. However, the Bill goes further, catching:

“… any contract created to have a similar effect to a construction contract for the purposes of withholding monies which would otherwise be due under the contract.”

This is an anti-avoidance measure designed to avoid the circumvention of the rules through side letters or similar instruments.

In the draft Aldous Bill, “cash retention” means:

“… monies which are withheld from monies which would otherwise be due under a construction contract, the effect of which is to provide the payer with security for the current and future performance by the payee of any or all of the latter’s obligations under the contract.”

It’s a broad understanding and stretches beyond the concept of a 3% or 5% retention pot.

Monies from other withholdings, such as those made by a payer pending the delivery of health and safety manuals, collateral warranties or performance bonds would need to go on deposit. With retention typically deducted from each interim or stage payment, multiple deposits into the scheme are likely. Moreover, there is the matter of efficiency. If a large project demands that clients (and Tier 1s, Tier 2s and so forth) put retention monies into the scheme, the cumulative outlay could spiral. This inefficiency may drive parties towards project bank accounts or, more likely, retention bonds, but those alternatives are hardly cost-free.

The Bill envisages that companion regulations in each of England, Wales and Scotland would set up the respective retention deposit schemes. The schemes would handle disputes over the release of retention, though no further detail on resolution processes is yet available. We’ve seen with the residential tenancy deposit schemes that dispute procedures can struggle with less straightforward claims. It will be interesting to ascertain how it is intended that these will fare better.

Depending on the jurisdiction, the Secretary of State or the Welsh or Scottish Ministers may direct by regulations when section 2 of the legislation comes into force. This part specifies that:

• Any clause in a contract entered into after the Aldous Bill receives Royal Assent that permits a payer to withhold cash retentions would become ineffective unless the monies are deposited in a retention scheme and, prior to the first withholding of retention, the payer has supplied the scheme’s name and contact details to the payee and the payee’s details to the scheme administrator.
• For pre-existing contracts, any retention monies must be moved to a retention deposit scheme. Should the payer fail to comply, it has to return the retention monies to the payee within seven working days.

I assume that the regulations to establish the deposit schemes would, in addition, provide for section 2 to take force upon these being up and running.

Unlike at the first reading, the text of the Aldous Bill makes no mention of how the schemes will be paid for, nor whether any surplus income from interest will still sponsor construction training. Possibly this would be dealt with in the regulations.

The second reading has been put back to 15 June 2018. That may temper any criticism that it cuts across BEIS’ delayed report on the potential transformation of retentions. Of course, it exerts pressure on the department to propose a solution that will appease the Aldous Bill’s backers. We may find out soon enough.