Securing payment of your retentions under a construction contract
Retentions exist to incentivise contractors to complete the contracted works. The idea behind them is that by withholding some of each monthly payment, this amount of money acts as a significant carrot to complete the Works to the required standard.
What are Retention Payments?
Retentions range in value. Under the JCT contracts in the UK, retention under an Intermediate with Contractor's Design 2016 (ICD 2016), the standard retention is 5% and under the Standard Building Contract 2016 (SBC 2016), the standard retention is 3%. Often, private client lawyers will try to increase these amounts in the contract amendments.
These amounts are withheld from each month's payments up until Practical Completion ('PC').
How Does Retention Get Released?
At the next interim valuation after PC, the Employer is only permitted to deduct half of the retention percentage (2.5% or 1.5%, depending on the contract). When calculating the amount of money to be paid to the Contractor, the Interim Payment Certificate will only deduct this lower amount, increasing the net amount to be paid to the Contractor to include the 'released' retention.
At the end of the Rectification Period, the retention percentage is 0%, and the final payment to the Contractor includes any outstanding retention in the same way.
What are the Criticisms of Construction Retentions?
Under an unamended JCT
Construction Retentions are widely regarded to be outdated. While the theory behind encouraging the Contractor to complete the Works holds true, the reality of construction retentions under an unamended JCT contract is often quite different:
In the event that the Employer becomes insolvent, the Contractor will never get any remaining retention (when Carillion folded, it was estimated to be holding some £800m in retentions);
Retentions are often released late (or not at all), or eroded significantly as part of the final account agreement process; and
Sometimes, retentions are offset against (perhaps) spurious or unfounded 'claims' so as to absolve the Employer from having to pay them.
In short, from a Contractor's perspective, there is little comfort in the retentions ever being paid in full. This doesn't really suit anyone - if the Contractor doesn't believe it will ever get its retention, it will have to include provision for it in its OH&P or elsewhere in the Contract Sum - the net result is that the Employer ends up paying more.
Under an amended JCT
The situation under an amended JCT is often worse for the Contractor. Construction lawyers representing the Employers usually strip out all of the protections afforded to the Contractor to guard against the disappearance of the retention:
The Employer's interest in the retention should as trustee for the Contractor - that way, if the Employer becomes insolvent, the money is available to the Contractor and not the Employer's creditors - this is frequently omitted;
The Employer should place the retention each payment cycle in a separate bank account (so that it is clearly identifiable as belonging to the Contractor), but this is also usually deleted.
How is a Construction Retentions Account different?
The Construction Retentions Account or "Retention Trust Account" exists to try and bridge some of these challenges.
Where one of these is used, the retention is deducted each month from the Contractor in the usual way under the contract but, instead of the Employer retaining it, it is paid into the Retention Trust Account with a trusted third-party escrow or payment service provider.
As the third party receives the money each month, it produces a statement for the Employer and the Contractor (or makes the information available via an online portal) so that everyone knows the retention has been paid in.
At Practical Completion, the Contractor presents the Practical Completion Certificate to the third party, and receives the release of the first half of the retention, and the second half is released against the Final Certificate.
In this way, the retention is released promptly, and in full, and we pay the Contractor without delay.
Is this a Retentions Deposit Scheme?
While there have been various attempts to set up 'official' Retentions Deposit Schemes, none of these have managed to make it through the legislative process.
Nevertheless, our scheme functions just as the Retentions Deposit Schemes were intended to.
How do I set up a Construction Retentions Account?
Setting up a Construction Retentions Account is very straightforward. There are just a few administrative steps that must be undertaken. It is helpful for the Contractor to raise the issue with the Employer as soon as possible (we recommend doing so with you tender return), so that everyone has the opportunity to get comfortable with what's required.
Amend the JCT Standard Form Contract
We recommend making a very minor, standard-form amendment to the JCT standard forms of contract (you can contact us for a free amendment for all the major JCT forms) which does the following:
Nominates a Retention Trust Account provider (eg, dospay);
Requires the Employer to pay all of the Retention each month (plus the VAT on the retention; see below) into the Retention Trust Account;
Requires that to happen each month before the final date for payment of the associated interim payment;
Permits the Contractor to suspend Works if the Employer doesn't pay the Retention into the Retention Trust Account in time; and
Permits the Contractor to recover the first release of the Retention against the issue by the Architect/Contract Administrator of the Practical Completion Certificate.
Request a Construction Retentions Account
You can request a no-obligation quote from us and usually open a Construction Retentions Account within 48 hours.
Provide Compliance Information
When you are ready to proceed, we will need to carry out our compliance checks on the Employer and the Contractor (though we have already done this for a good number of Contractors, which helps to speed things up), to verify the terms of the Construction Contract and to issue you with the Retentions Trust Account Agreement.
Receive your Construction Retentions Account details
Once all of the compliance checks are complete and the Retentions Trust Account Agreement is signed, we can provide you with the account details.
How does the Construction Retentions Account work with the monthly payment cycle?
Each month, on the issue by the Architect/Contract Administrator of the Interim Payment Certificate, the Contractor will send two invoices to the Employer:
An invoice for the amount stated as due, plus the applicable VAT, which will bear the bank details of the Contractor, for payment directly from the Employer to the Contractor; and
An invoice for the Retention relating to that Interim Payment Certificate, which will bear the bank details of the Retention Trust Account, for payment directly from the Employer to that account.
A note on VAT
We recommend (as you will note from our explanation of the proposed contract amendment above) that provision be made to include the VAT chargeable on the Retention in each month's deposit. This ensures that in case of Employer insolvency, the Contractor will recover the Retention in full and the VAT that needs to be paid on it.
This can lead to a small cashflow headache, however - during a long construction contract, in effect, the Contractor will have issued VAT invoices to the Employer for the VAT payable on the Retention and have had to account to HMRC for that VAT, but will not have actually received the cash (as it is being held in the Retentions Trust Account).
Contractors tell us, however, that the requirement to pay up to 20% of 3-5% of the monthly interim payment to HMRC is a small price to pay for the comfort that the Retention Trust Account otherwise provides.
How do I get paid my retentions?
Under our Retentions Trust Agreement, the Employer agrees that we can release the retention to the Contractor in line with the construction contract and pay it out upon simple presentation of the Practical Completion Certificate or the Final Certificate.
How much does a Construction Retentions Account cost?
The cost of one of these accounts varies according to two factors; the amount of money that will be passing through the account and the status of the Employer (be they individuals, UK companies, offshore companies, or trusts). If you would like a no-obligation quote for your retentions account, please contact us.
Is interest payable on a Construction Retentions Account?
We don't pay interest on Retentions Trust Accounts. Instead, we roll the interest up to cover our overheads, compliance and ongoing FCA-regulation which allows us to offer incredibly reasonable rates on Retentions Trust Accounts instead.