Last month, the Scottish Government released guidance around the use of retention in public sector construction projects. Read on to find out about the new requirements and who they apply to.

The retention of funds otherwise payable to a contractor or sub-contractor (often a percentage of the contract sum) is considered problematic by some in the construction industry, with concerns often raised about the delay in the release of retention monies, or the threat of up-the-line insolvency on the security of the funds.

In light of these issues, last month the Scottish Government released Construction Policy Note 3/2022 which highlighted the publication of new guidance within the “Client Guide to Construction Projects” specifically addressing the use of retention in public sector projects.

Any public body falling within the scope of the Scottish Public Finance Manual must implement the guidance in the context of its projects. This means that the guidance will also have implications for main contractors, subcontractors and likely also other parties in public sector project supply chains.

We have set out the key requirements introduced by the guidance below, which comes into force on 20 February 2023.

Key Requirements

The key takeaways from the guidance, which the public bodies (or “contracting authorities”) must comply with, are summarised below:

  • Consideration of whether retention is required. The contracting authority must actively consider whether retention is required in the context of the specific project. To make that call, experience should be used to assess the risks involved in the project and the likelihood of defective work occurring.
  • Careful consideration of rates. If retention is considered necessary, the rate should be carefully considered – there should be no “default” approach whereby standard retention percentages are automatically applied.
  • Prompt release. Where used, retention should be applied as the minimum required amount and should be held for the shortest appropriate duration. It should then be automatically released once the relevant contractual trigger is achieved.
  • Supply chain equivalence. The contracting authority’s contract with its main contractor should include clauses that ensure the same principles around retention are applied within the supply chain. The contracting authority can also require the main contractor to open trust accounts with its sub-contractors to protect retention monies.

The full guidance can be found here: https://www.gov.scot/publications/project-initiati...

What does this mean for your business?

As can be seen from the above summary, the new guidance requires contracting authorities to take a considered approach to the use of retention in public sector projects.

However, for the reasons set out in the final bullet point above, these obligations are unlikely to stop at the contracting authority.

Main contractors and potentially sub-contractors working on public sector projects will also have to think twice about the use of retention down the line to ensure they comply with their up-the-line contracts, which going forward will need to include provisions obliging them to implement these retention principles in the wider supply chain.

Contributor

Lucy McCracken

Senior Solicitor