Cash retention under construction contracts: short life working group final report and recommendations

1. Executive Summary

1. This report concludes the work of the short life working group established in January 2021 by the Minister for Business, Fair Work and Skills to consider and make recommendations on the practice of cash retentions under construction contracts.

2. This summary sets out the recommendations which we believe will, if implemented, resolve many of the challenges associated with the use of retentions. The full report provides further detail on the work of the group, and of our recommendations.

3. The Short Life Working Group (SLWG) has maintained a clear focus on the remit it was set. Members consistently displayed their drive to deliver practical solutions and worked effectively together demonstrating collaboration, goodwill and creative thinking.

4. We recognise that our recommendations must be considered alongside other proposals for change within the construction sector and, in particular, the work of the Construction Leadership Forum (CLF) and the pathway to longer term industry transformation set out in the Construction Recovery Plan (Recovery Plan - Construction Forum Scotland and Construction Accord (A Scottish Construction Accord is in development)

5. Following detailed discussions, we are clear that our ambition is to see a significant reduction in the use of retentions in construction contracts, with alternative mechanisms in place to ensure high quality delivery and contract compliance. This aligns with the Scottish Government's long-term aspiration to reduce or remove the need for retentions, with alternative mechanisms in place to ensure contract delivery and compliance (reflected in the work of the Construction Leadership Forum Recovery Plan (above) to improve construction quality, including regulatory compliance). This position is also supported by key stakeholders such as Build UK and the Civil Engineering Contractors Authority (CECA), among others.

6. We are also clear that we do not, at this time, support an outright ban on the use of cash retentions in construction contracts in Scotland. This is because there is no straightforward, low cost and easily accessible alternative mechanism of assurance available to all of the industry. Organisations which commission construction work must have the ability to avoid becoming liable for unmet contract performance by implementing means of assuring it. We believe that a near term ban on retentions would create a significant shock within the sector at a time when it is already facing many challenges.

7. The SLWG unanimously supports the following actions which are described in more detail in the body of the report. We believe they will deliver tangible outputs to improve cash-flow and business sustainability across the construction sector, particularly for SMEs, who are often disproportionately affected by the current practice of retention.

8. Members of the SLWG are keen to see these recommendations implemented as quickly as possible with some members eager to see legislation in this area as a priority. However, the group recognise that wider consultation and business case development will be necessary before legislation can be brought before the Scottish Parliament.

9. Although the work of the SLWG is now complete members expect to be advised of progress and have offered to act as a sounding board as recommendations are developed and implemented.

10. Our recommendations are as follows;

• Scottish Ministers should take forward legislation that will apply to both public and private sector construction contracts to establish a statutory custodial Retention Deposit Scheme, following development of a detailed business case
• Scottish Government should publish a retention best practice policy note for contracting organisations by end January 2022 and consider with contractors, professional bodies and the wider industry, how best to disseminate and promote compliance. This should include a move towards automatic release of retentions at the earliest opportunity unless a clear issue had been identified and an approach to, and timetable for, resolution set out. It will also provide a requirement that organisations withholding a cash retention should not:
  • repay late or partially, without full and clearly articulated justification
  • render it liable to claim by an upstream insolvent supply chain party
  • use more than one form of assurance on construction contracts
• by end January 2022 the Scottish Government should invite all contracting authorities involved with major construction projects (a major construction contract is defined in the Scottish Public Finance Manual as one which "has a total anticipated whole life cost of £5m+) to publish their retention policy and monitor and report on compliance. This should be a requirement for all major projects delivered using Scottish Government finance
• within six months of project handover (practical completion) for each major construction contract, require contracting authorities to publish their compliance with retention best practice or explain how and why they have deviated from it
• Scottish Government should ensure that reference to retentions and fair payment is included within the Construction Accord
• Scottish Government to work with industry to ensure retention best practice is reflected in standard construction contracts, including dispute resolution and conflict avoidance procedures and agreed payment procedures
• promote further consideration/implementation across the sector of the removal of retentions from contracts as demonstrated by Network Rail. This includes;
  • progress payments not subject to automatic deduction as work proceeds
  • the final payment adjusted to place greater emphasis on completing project closure activities such as the Health and Safety file and producing a [priced] list of patent defects
• upon publication of best practice policy notes, Scottish Government and industry should host a major conference or series of webinars to focus on the promotion and implementation of retention best practice, including conflict avoidance
• invite Government Enterprise Agencies to work with representative bodies and businesses in the construction sector to identify and deliver efficiency opportunities. This might include a feasibility study to consider implementing an approach to the management of construction project cash-flow using digital technologies such as smart contracts

11. Members of the Short life working Group:

• Oonagh Gil - Chair
• Ann Allen - CICES (Chartered Institute of Civil Engineering Surveyors)
• Lynda Campbell - I H Brown
• Colin Baird - Balfour Beatty
• David Christie - Robert Gordon University
• Mike Conroy - UK Finance
• Christina Gaiger - RIAS (Royal Incorporation of Architects in Scotland)
• Iain Gardiner - Colorado Group
• Colin Judge - Scottish Government – Scottish Procurement and Property Directorate
• Gordon Matheson - Matheson Plumbing
• Paul McAloon – Robertson Group
• Jim Rankin - Glasgow City Council