Retention in the construction industry - and the dilemma of trust

It’s fairly standard practice for building contracts to allow the employer to withhold monies due to a contractor until any defects have been corrected.

This so-called retention, based on flawed logic, is not particularly popular with contractors, and could potentially even work against the employer.

So why is it still commonplace?

Perhaps there’s a deeper issue at play here, such as lack of trust between businesses, and faith in the process.

Increasing traction

Retention means that the employer gradually builds up a pot of money that can be dipped into if the contractor fails to comply with the contract conditions: particularly in relation to rectifying defects after the project has essentially been completed.

For understandable reasons, retention has never been particularly popular amongst contractors. After all, it essentially means they aren’t being paid the agreed price until long after work has been completed. In short, it’s often viewed as extended credit.

That unpopularity appears to be gaining some traction with the issue having been debated in parliament earlier in the year.

That growing interest is also underlined by the considerable media interest in Specialist Engineering Contractor’s Group research that suggests over £1billion is currently being retained from the top 12 UK construction contractors.

Flaw in the logic

But is retention really as bad as contractors would have you believe?

There is undoubtedly a flaw in the logic behind retention.

If you boil it down, retention is about the employer building up some security to cover them in the event that the contractor doesn’t fulfil contractual commitments.

The problem with that is that if you have an unscrupulous contractor who, for example, never intends to return to site after completion to rectify defects, they will price the job on the assumption they will never get paid the retention.

On the flip side, if you have a diligent contractor who always intends to deliver on the contractual obligations, their cashflow is being interrupted (and therefore their economic stability adversely affected) in expectation of something that should never happen.

And, ironically, if that cashflow is restricted too much, insolvency may end up causing the very thing retention was supposed to guard against: a failure to rectify defects.

Employer downside

In applying retention, therefore, the employer could end up paying more than they should or, alternatively, fail to have trouble-free project delivery.

While there may well be a flaw in the retention logic, looking at things from an employer’s point of view, there are a couple of pragmatic problems.

If there is a snagging item in the works, it may be a major issue for the employer but, without the carrot of release of the retention, there may be no impetus for the contractor to come back.

Moreover, whilst at every monthly inspection it may appear that the works are being carried out fully in compliance with the building contract, there may be latent defects that only become apparent after the employer takes occupation of the property.

An employer cannot know for sure that the works are fully compliant (meaning that the contractor should indeed be paid 100% of the value of works completed) until those works have been bedded in for a while.

A blunt instrument

Rightly or wrongly, it is understandable that an employer will want to hang on to some sort of retention. Indeed, I wonder how many of the top 12 UK construction contractors take a similar approach with their own sub-contractors.

When you analyse both sides of the argument, it indicates that retention is being used as a blunt instrument to deal with the fact that there is insufficient trust and confidence in the process.

Employers just don’t have sufficient trust and confidence that contractors will do what they have promised to do well.

I think there is also an issue of confidence in the interim valuation process.

If an employer could be certain they will only pay 100% of the contract value where the works have been completed in absolute compliance with the contract then there would be no need for retention at all.

Looking at the reports coming out of the Edinburgh Schools fiasco, however, there may well be a problem with quality control within the industry.

It is, therefore, hardly surprising that there may be a lack of confidence in the valuation process.

Improving trust and confidence

Dealing with trust and confidence is not something that can be done overnight. Nor is it (dare I say) something that can - or should - be dealt with through legislation.

The perceived need for retention could possibly be reduced where strong long-term relationships are built up between employers and contractors.

But, if the industry were to go down the route of ever-more frameworks then that is likely to keep new entrants out of the market: reducing competition and increasing costs.

Confidence in the valuation process could perhaps be increased with more use being made of proactive site managers and clerks of works. But that will add to overall project costs.

So like it or loathe it, retention is, I suspect, going to be around in one shape or form for the foreseeable future.

Jennifer Young

Jennifer Young was elected to be the Chairman of Ledingham Chalmers in January 2012, after 20 years working as a construction lawyer with the firm.

Posted, 27 April 2017 by Jennifer Young
Categories: Construction | Corporate