Dr Andrew Agapiou, a senior lecturer in the Department of Architecture at the University of Strathclyde, and Dr David Christie, associate dean at the School of Law and Social Sciences at Robert Gordon University, argue that reforming rather than abolishing cash retentions should be the way ahead in Scotland
The Scottish parliamentary elections approach. We can expect to hear lots of big visions and grand plans. Cash retention reform might seem a small fix in that context but it is one which will have significant benefits in the construction sector, not least to the small businesses upon which the sector relies.
The UK Government has recently announced a plan to abolish cash retentions altogether. That is with the aim of safeguarding smaller contractors from insolvency up the supply chain. That abolition effort would throw the baby out with the bath water. It is better to retain retentions, but reform them. That would keep their useful features but lessen the negative impacts.
Cash retentions are not a doctrinal legal formulation but a pragmatic tool. These financial holdbacks typically involving withholding around five per cent of the value of work carried out until completion of the project and the expiry of a defects period.
They serve a useful purpose in incentivising completion while providing an employer with a readily accessible fund to contribute to the costs of fixing any defects. They do not require the legal formalities and complexities of other forms of security – and so have a strong appeal, to some, as a ‘cheap and cheerful’ back up option.
The cost of abolition in terms of loss of confidence has yet to be examined. Will the loss of retention lead to the imposition of more onerous forms of security?
However, the way these funds are currently managed has created significant problems for firms further down the supply chain.
Across the UK construction sector, it is estimated that several billion pounds are held in retention funds at any given time. Much of that money belongs to subcontractors and specialist firms — many of them small and medium-sized enterprises (SMEs) — who often wait many months, and sometimes years, before receiving payment for work that has already been completed. Payment practices that lock up working capital can therefore have immediate consequences for business resilience.
The risks become even more serious when insolvency occurs. Supply chain firms often have little realistic prospect of recovering what they are owed.
The collapse of Carillion exposed a structural weakness in how retention funds are handled. These monies are not usually held separately and can become entangled within a contractor’s general finances.
Many within the industry believe the current system is no longer fit for purpose.
Industry bodies, parliamentary committees and academic research have repeatedly highlighted concerns about the fairness of retention practices and their impact on supply-chain stability. The UK Government consulted on the issue in 2017, recognising the widespread concerns raised by contractors and subcontractors alike. Private members’ bills have been introduced at Westminster seeking reform, and industry organisations have continued to press for change. The Scottish Government convened a short life working group in 2021 which recommended significant changes (and of which one of us was a member).
Yet despite years of debate, meaningful legislative reform has never materialised. The risk of the current abolition effort is that it is too radical. Consensus is required.
We believe that reform should focus on three things:
Firstly, the use of retention trust schemes. Such mechanisms are already used in New Zealand and Australia. These separate retention funds from the rest of a contractor’s assets. In insolvency, these funds are then available to the supply chain. Unlike other safeguards, this would retain a great deal of the simplicity which retentions have.
Secondly, the legislation should make clear that retention payments are caught within the ambit of the Construction Act. This will allow parties to use statutory adjudication to fast track their claims for money where it is withheld.
Thirdly, we urge the government to explore the use of technology to streamline payments of retentions down the supply chain. Smart contracts can be set up to make payments automatic. At the very least this will change the focus from an employer having to decide to pay, to having to justify non-payment.
As Scotland approaches its next parliamentary election, policymakers should revisit this long-standing issue. Reforming construction retentions would not require radical changes to industry contracts.
The mechanisms are already well understood. What is needed is a legislative framework that protects retention funds and ensures that they are returned promptly once contractual obligations have been fulfilled.
Construction plays a central role in Scotland’s future. The sector will deliver the housing, schools, hospitals and infrastructure while supporting thousands of jobs across the country. It will also be critical in delivering the investment required to meet climate and energy transition targets.
Ensuring that construction supply chains remain financially stable is therefore not simply a narrow industry concern but a wider economic priority for us all.
