Cash retention under construction contracts: consultation analysis

1. Introduction 

There is evidence that some payment practices prevalent in the construction industry are a barrier to investment, productivity and growth. Cash retention, where the process is misused or abused, can be one such practice. 

As a sum of money withheld from the contractually-agreed amount due on a construction project, the purpose of a retention is to mitigate risk should some of the work not be completed satisfactorily, or any resulting defects not be rectified by the contractor.

The part of the contract sum which is held back is intended to provide a means of incentivising contractors and subcontractors to return to correct any defects during a specified period of time or to provide towards a means of funding the procurement of another contractor to do so if necessary, as outlined in contract terms and conditions. 

In most cases a retention is imposed by the client employing the main (also known as Tier 1) contractor and this is mirrored in all subsidiary contracts throughout the supply chain. 

Following concerns expressed by parts of the industry, the Scottish Government agreed to undertake a review of retention payments. To support the review, the Scottish Government commissioned independent research from Pye Tait and that research is published alongside this consultation. It illustrates the challenges with retentions - in particular understanding the extent to which this practice has a negative impact and what solutions would be effective and proportionate in addressing this.

The UK Government undertook a similar review of retention payments in the construction industry, which concluded in January 2018, and was published in January 2020.^[6]