Ryan McCuaig, senior associate, construction disputes, Anderson Strathern, tells Project Scotland what developers and contractors need to know about the new Commercial Payments Bill
THE Commercial Payments Bill was introduced by the UK Government (initially named the Small Business Protections (Late Payments) Bill) in response to what many consider unfair payment practices. For the construction sector, however, one proposal is likely to have particularly significant consequences: the abolition of retention clauses.
Each party to a construction contract will view this change differently. For contractors, the attraction is obvious – retentions restrict cash flow on work that has already been valued and certified. In practical terms, a contractor would no longer have a proportion of interim payments retained by the employer for work, goods or services which it has already supplied.
This will be particularly significant for SME contractors, especially those with retentions across several live projects. Money that businesses might otherwise use to invest in growth or absorb rising costs can remain tied up in projects long after the underlying work has been valued. Against today’s economic backdrop of tight margins and long-standing concerns about cash flow and late payment, there is a clear policy reason for reform.
However, employers, developers and public bodies will see these proposals as removing a layer of security that they can currently rely upon to ensure that defects are remedied effectively and timeously, and to mitigate against the cost of instructing others to complete a project following a contractor’s insolvency.
What should employers do now?
Employers should now start reviewing their existing contracts and ‘standard terms’ and plan ahead. The Bill, as currently drafted in the House of Lords, provides for a transition period of two years beginning with the day on which the relevant section comes into force.
In the absence of retention clauses, I expect that employers will place heightened focus on contractual clauses which provide for defects remediation obligations, parent company guarantees, performance bonds, step-in rights, collateral warranties and project bank account arrangements.
Contracts are likely to face greater scrutiny. A clause that looks like a retention, even if it is called something else, is likely to be challenged. The issue will not be the label used by the parties, but what the provision does in practice. In addition to further scrutiny, there will likely be a short-term spike in adjudication/litigation over disputed terms.
What should contractors do now?
Contractors will want to consider what alternative protections they can offer to employers and how they should be priced. SMEs may wonder whether they will have to adjust tendering prices to account for a heightened sense of risk on the part of those with whom they contract, at least in the short term.
The abolition of retentions would improve cash flow on existing projects, but it may not make procurement easier, as contractors may face more requests for bonds, guarantees, warranties, or financial information at the tender stage. That may be easier for larger contractors to manage. A reform designed to help smaller businesses with cash flow could create new barriers if employers respond by tightening their security requirements.
When disputes arise
Final account disputes are likely to be a pressure point. Retention has often given employers leverage when the final account is being resolved. Contractors may say that is part of the problem, and employers may say it is necessary where claims, contra-charges, and defects remain unresolved. If that leverage is removed, employers may respond earlier in the payment cycle. There may be more detailed certification, more pay-less notices, tighter set-off wording, and earlier adjudication. That does not remove the dispute. It moves it to a different stage in the contract.
Looking ahead
If abolition is the direction of travel, which it likely will be, the construction industry needs clarity on where the courts will draw the line. Parties will need to know what forms of alternative security remain permissible and what will be treated as retention by another name. Without that clarity, the next round of disputes may focus on replacement mechanisms rather than retention itself.
For now, the sensible course is preparation. Employers should audit their contracts and security requirements. Contractors should consider how abolition may affect tendering, pricing and the security they are required to provide. Neither side should assume that removing retention clauses will simplify construction contracts.
