Why we need to start adapting project bank accounts to ring-fence retentions

As I mentioned in my last editorial, it is over 5 years since the UK government published its consultation report on reforming the practice of withholding cash retentions (BEIS, 2017). It confirmed that contractors lose hundreds of millions of pounds of retentions each year due upstream insolvencies.

The consultation focused on three options: retaining the status quo, publishing more guidance, or ring-fencing retention monies in a secure pot. The overwhelming majority of respondents voted for the last one, but the outcome of the consultation has not yet been acted upon.

NEC has done its bit by drafting excellent guidance which was published last year by the Construction Leadership Council (CLC and NEC, 2022). There is now an opportunity for NEC to take matters further as there is renewed interest within the UK’s devolved administrations in reforming the retentions system.

Recently the Scottish government published guidance for contracting authorities urging them to protect cash retentions within a trust arrangement. The Welsh government is considering a similar policy for Welsh contracting authorities.

Using project bank accounts

In the light of these developments, we should perhaps consider an addendum to the NEC project bank account option Y(UK)1 when a cash retention is required. In principle there is no barrier to keeping a retention in a project bank account − after all, cash retention is effectively a deferred progress payment.

A tier 1 contractor’s retention is a combination of its own retention and that gathered in from its supply chain. It is only necessary that the tier 1 contractor identifies those named suppliers which have contributed to the project retention and in what proportion.

Certainly ring-fencing cash retentions in accounts protected by a trust is the favoured solution in many common-law jurisdictions, including states in Australia and the USA. I would be interested in hearing from any NEC users who currently use a project bank account or similar device to ring-fence retentions.

References

BEIS, 2017 Retentions in the construction industry: BEIS Research Paper 17
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/654399/Retention_Payments_Pye_Tait_report.pdf

CLC and NEC (2022) NEC and CLC guidance for dealing with retention payments under NEC3 and NEC4 contracts. https://www.neccontract.com/getmedia/d11c808f-b232-4af9-979a-82b94be8d7ff/NEC-and-CLC Guidance-for-Dealing-with-Retention-Payments-Under-NEC3-and-NEC4-Contracts-Final-9-11-22-1.pdf