Cash retentions provide an assurance to employers that any snagging issues or defects post-completion will be rectified by the contractor. However, abuse of this process can cause issues in an industry where cash-flow is key.
Where retention sums are held on to by the employer longer than they should be, or just held on to full stop, this can be highly detrimental to a contractor counting on receiving the money they are due, when they are due it.
It is perhaps no surprise, then, that some might consider that the current retention practices only exacerbate the power imbalance between employer and contractor (or contractor and sub-contractor) that the introduction of the Construction Act 1996 aimed to level up.
It is not, though, simply inhibition of cash flow that is the issue. The worst-case scenario is where the company holding on to the retention sum is at risk of going insolvent; if the company does go bust, the retention sum held by them could be lost altogether.
What is being done about it?
These issues are old news. In 2018, a private members' bill sought to introduce ring-fenced deposit schemes to protect contractors' money from the insolvency risk. However, with the Westminster parliament clogged up with Brexit business, the possibility of a second reading fizzled out. Since then, two other bills have suffered the same fate.
Now, it seems, the Scottish Government is taking matters into its own hands.
What do they want to know?
In its new consultation, the Scottish Government wants to find out what the industry thinks about possible alternatives to retention. These include retention bonds, performance bonds, escrow and parent company guarantees amongst other potential solutions.
As a prompt, alongside the consultation, the Scottish Government has published "Retentions in the Scottish Construction Industry", a report by Pye Tait which seeks to highlight key issues with current practices.
The deadline for responses to the consultation is 25 March 2020.
What's next?
If results of this consultation point in a clear direction, it could create the impetus for the Scottish Government to legislate. Indeed, rather than looking to Westminster to take the lead on this issue, the source of reform could turn out to be a little closer to home.
The Scottish Government Consultation on Cash retention under construction contracts can be found at the following link: https://www.gov.scot/publications/practice-cash-retention-under-construction-contracts/
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