Cash Retentions

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

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.

However, the system is often abused, negatively impacting many businesses in construction, particularly SMEs.

As a result, ECA, BESA and various partner organisations have been pressing Government to reform this practice. Reform of cash retentions in construction is now supported by a broad range of politicians, business bodies, construction trade associations, and professional bodies.

What are cash retentions?

• Cash retentions are monies held back by larger contractors and clients from subcontractors if issues of non-performance arise such as defects 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 owed subcontractors around £2 billion at the time of its insolvency.
• 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 over a three-year period (prior to the collapse of Carllion). 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 late payment and 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.

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 over a three-year period (prior to the collapse of Carllion). 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 late payment and 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.

What is the Aldous Bill?

• The ‘Aldous Bill’ is a ten-minute rule bill introduced in the House of Commons by Peter Aldous MP. Its full title is the ‘Construction (Retention Deposit Schemes) Bill’.
• The first reading of the Aldous Bill went unopposed on 9 January 2018, just 6 days before the collapse of Carillion. The second reading is scheduled for 22 March 2019.
• The Bill aims to change retentions practice and protect monies from insolvency, by holding the retentions in third party bank accounts.
• BESA and ECA are in regular discussion with Government and the Construction Leadership Council and have raised the Bill directly with Business Secretary Greg Clark.
• Abuse of retentions has already been legislated against in countries including the USA, Germany, France, New Zealand, Australia and Canada

Paul Antino, MD, NRT Building Services Group

“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."

Tony Davis, MD, AMD Electrical

“In the 31 years I have been in the industry, I have probably worked for 100 different larger contractors. I can count on one hand how many of them actually abide by the terms of the contract, with no fuss, no nonsense, and actually pay you on time."

Barry Lewis, MD, Lloyd Morris Electrical

“Currently we are owed nearly £600,000 in retentions, which comprises current contracts and completed contracts in the last 18 months. The effect of having over half a million pounds in retention has a serious effect on our cash flow and ability to trade."