Retentions: Carillion should mark the beginning of the end

Responses are likely to have spiked amid the furore over Carillion’s liquidation and the staggering amount of retention monies it is reported to have held (some media reports indicate in excess of £1bn).

At first glance, the Carillion story supports both sides of the argument for and against cash retentions.

Retentions are an incentive (some may say a stick) for contractors to rectify defects, usually do not have a price tag attached (although research by Pye Tait shows some contractors increase their prices to offset retention costs), and offer a degree of security in a contractor-insolvency scenario. 

The story changes when looking at the supply chain. Retentions often represent the margin on a job and can severely affect contractors’ cashflows. More importantly, retentions are not ringfenced and are likely to be lost where the client is insolvent.

Contractor perspective

Multiplex’s legal counsel Laura Dunstan is of the view that arrangements relating to retentions should be looked at “on a project-by-project and individual subcontractor basis”.

“If construction is to make a success of Brexit, there needs to be a move from the traditional to a contemporary model”

However, she points out that “both upstream and downstream retentions only make a portion of the security required, with bonds, guarantees and insurance put in place to help protect against defects, insolvency, etc”.

While retentions can be useful in making sure defects are addressed quickly, Ms Dunstan also notes that “they do have an impact on cashflow for both subcontractors and contractors alike”.

Brexit turning point?

Soon, the industry will start facing the realities of Brexit. Although construction has tried to get its voice heard, the government still seems oblivious to the detrimental impact leaving the EU is likely to have on the sector.

If construction is to make a success of Brexit, there needs to be a move from the traditional to a contemporary model, from adversarial to collaborative ways of working, and from self-centred short-term to collaborative long-term thinking by all stakeholders. 

Cash retentions had a role to play in a different socio-economic environment. Should companies continue to block cash, or should they allow for innovation and invest in new talent? Should they refuse to consider alternatives way of securing their interests, or help contractors out of insolvency’s way?

For me, the answer is clear: current cash retentions practices should be a thing of the past. It is time for the government to take action, enable better collaboration among construction players, and offer reassurance to an industry that so far has been largely ignored in the Brexit discussions.

This article first appeared in Construction News on the 19 January 2018.

About the author

Brandusa Tartaru-Marinescu was a Construction Partner in our Real Estate team.