One of the challenges affecting the construction industry is slow moving cash flow and delayed payments. When payments are delayed or missed, the effect can be felt throughout the supply chain often with the smaller businesses bearing the brunt. Within the construction industry a mechanism called ‘retention’ allows for a small percentage of each interim payment to be withheld until a future date, which naturally causes cash flow issues for those awaiting payment.
The Government is now turning its attention to the retention practices in the industry and recently announced the forthcoming publication of a Prompt Payment & Cash Flow Review and the extension of the Reporting on Payment Practices and Performance Regulations 2017. The aim of the review and update is to bring greater transparency to the payment practices and performance of large businesses. One of the measures anticipated is the requirement for businesses in the construction sector to report on retention payments.
Retention is money held under a contractual mechanism whereby for each interim payment made by an employer under a building contract (or a contractor under a sub-contract), the employer (or contractor, as appropriate) will withhold a certain percentage of the interim payment (typically 3% - 5%). This sum is referred to as ‘retention’.
The typical arrangement for the payment back to the contractor of this retention (known as the ‘release’) is that upon practical completion, half of the retention is paid to the contractor (or sub-contractor) and only once any defects notified during any defects liability period (often 12 months) have been rectified will the remaining half of the retention be released.
The appeal of a retention for an employer is obvious – it provides a degree of security for the contractor’s performance. In the event a contractor defaults the retention can be used as a fund to put towards completing or rectifying works.
However, from a contractor’s (or a sub-contractor’s) perspective, a retention can be problematic in terms of cash flow. To illustrate, on a £20 million project, a retention of 5% leaves a contractor £1 million short until the milestones of practical completion and the end of a defects liability period have been reached which can take as long as 24 months.
The Department for Business and Trade will shortly publish a review which will seek to bring greater transparency to payment practices, including requiring businesses in the construction sector to report on retention payments.
Based on a consultation from earlier this year, we can expect the following types of data to fall under the requirements:
In terms of which organisations will fall within the envisaged reporting regime, the January 2023 consultation suggested that the proposals for retention reporting would apply to companies that are required to report their payment data under the current regulations. The regime will therefore likely apply to those companies that exceed two or all of the thresholds for qualifying as medium-sized companies under section 465(3) of the Companies Act 2006.
Those thresholds are:
On the whole, stronger measures will benefit UK businesses throughout the supply chain by fostering a stronger payment culture and providing businesses with more predictable and reliable cash flow. The new measures may also reduce the time spent by businesses chasing payments therefore freeing up more time for other activities that will help them grow.
Watch this space for further details following publication of the Prompt Payment & Cash Flow Review.
If you have any queries, or would like any further information about retention or construction matters please contact the construction and infrastructure team.
