Following the formation of a small working group in Scotland to look at retentions, a new paper has been presented to Scottish Government.

Retentions have long blighted construction and this paper sets out conclusions from the working group together with clear recommendations designed to support the construction sector and improve cash flow and business sustainability, particularly for small and medium sized businesses.

Whilst the recommendations fall short of recommending an outright ban on retentions it recommends automatic release and legislation that will ensure retentions are held in a Retention Deposit Scheme.

The ten key 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
    • 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

Commenting on the report, FIS CEO Iain McIlwee said:

“This is another welcome intervention from Scottish Government and we are keen to support this progress.  Whilst we would all like to see a complete end to the practice of holding retentions, at least this way we see the link between working capital and retention broken in a similar way to the Aldous Bill in England which FIS Members supported.”

The full report Cash retention under construction contracts: short life working group final report and recommendations can be read here 

The FIS formal Position on retentions and Contractual reform can be read here