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Retentions

A dedicated area highlighting the issue of retentions in the built environment...

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What are cash retentions?

Cash retentions are money held back by larger contractors and clients from subcontractors in issues of non-performance arise such as defects arise on work undertaken.

Money is deducted by clients from payment to their subcontractors, who then consequently hold back similar figures from their own subcontractors.

In theory, if there are no defects, then the monies are paid in full to the subcontractor in a timely manner. However, the system is known to be widely abused.

Retentions are on average worth 5% of a contract’s total value, but can be up to 20%.

Cash retentions are deducted from payments owed in respect of labour, materials and works already delivered and carried out, and therefore legally belong to the companies that carried out the work.

Thousands of SMEs in the industry wait 2 - 3 years to recover outstanding retentions, which despite the Construction Act routinely get linked to decision, certificates and events, under contract above, but they can be kept for as long as 10 years.

The value of cash retentions is often higher than the profit margin for work undertaken and sits at an amount which is; a) over the small claims threshold and therefore not viable under the courts system, and b) not necessarily viable under an adjudication.

Who holds retentions?

Retentions are held by private and public sector clients against their subcontractors, with over £10.5bn of SME working capital locked in retentions annually. Some £7.8 billion of this has been unpaid in the last three years.

Over £1 billion in cash retentions is owed to 12 of the largest construction companies, according to research from SEC Group.

Construction giant Carillion held around £800m in retentions at the time of its insolvency (although in total Carillion owed subcontractors around £2 billion).

Some 84 per cent of public bodies, including local authorities, apply cash retentions on businesses within their supply chain.

The amount of retentions held by public bodies ranged from 1.5 – 10% of the value of the work.

Of the public bodies holding cash retentions: 20% invested the cash, 51% used the cash as working capital, 27% left the cash untouched, and only 2% did not draw down the funds until needed.

What is the impact on industry of retentions?

Deprivation of working capital leaves businesses unable to grow (bid for new work), invest (engineering R&D and investment in digital transformation), recruit (new workers and apprentices), pay tax bills, and therefore precludes productivity improvement.

As retention monies are not protected, ring-fenced or held in trust, if a contractor goes bust, the money is lost by subcontractors, and goes to other creditors, often outside the industry.

In the UK, recent government research shows £700m of retentions were lost from upstream insolvency in the last three years. For each working day, the industry loses almost £1m, £4.5m a week or £20m a month.

Research has found that SMEs spend on average 130 hours per year chasing late payment from larger firms. 34% of SMEs borrow to cover cash flow issues caused by cash retentions.

Often this is written off as bad debt, due to the resource implications of chasing monies due.

Cash flow issues leave businesses unable to: bid for new work, take on new workers and apprentices, pay tax bills, and improve productivity.

The knock-on effects of cash retentions can also include stress and mental health issues.

The current system is also a causal factor in bringing about a less efficient public procurement system and results in lower tax receipts for the public purse.

CASE STUDY

Paul Antino

Managing Director, NRT Building Services Group Ltd

 “We are an SME electrical contractor, and also a member of ECA. Like many firms, average payment terms for monies owed to us are between 45 and 60 days. In the past 12 months, two of our existing clients have asked us to go to 90 day payment, which we declined and have chosen to no longer work for those two companies, but that’s a tough decision.

 

“Some of the businesses we work for offer earlier payment on extended payment terms in exchange for a fee of up to 3% to get paid on time. However, our profit margins not much more than 3%, making this completely unviable and unfair in any case.

 

“We spend a lot of money investing in training and apprentices, but this is unfortunately one of the first areas we need to cut back on when we are paid late.

 

“In terms of retentions, as a business we currently have £252,000 being held, of which £117,000 is work currently ongoing and £135,000 is jobs that are finished with no outstanding problems.

 

“Sometimes your money can be held in retentions through no fault of your own. On a construction site there could be 20 different trades that participated, and your money could be held back because somebody else has not resolved a dripping tap, for example. Despite the Construction Act, pay when certified is still rife!

 

“If the Aldous Bill enters into law, this could make a massive difference by ensuring monies owed to us in cash retentions are not unfairly withheld from our business.”