Scottish government opens consultation on cash retention in construction

The Scottish government has opened consultation on the use of cash retentions within construction contracts

The Scottish government has agreed to a review of retention payments after hearing concerns expressed by parts of the industry. It commissioned research from management consultant Pye Tait to support the review and the report is published alongside the consultation.

1. Consultation overview

There is evidence that some payment practices prevalent in the construction industry are a barrier to investment, productivity improvements and growth.

Following concerns expressed by parts of the industry, the Scottish government has agreed to undertake a review of retention payments. Research from Pye Tait illustrates the challenges with retentions – in particular understanding the extent to which this practice has a negative impact and what solutions would be effective in addressing this.

2. Why the Scottish government is consulting

The purpose of this consultation is to seek information on the practice of cash retention in public and private sector construction contracts in Scotland and to gather views on the findings of the supporting documentation.

A number of key issues were identified by the research:

• A significant proportion of companies say they deliberately avoid business in which retentions are involved
• The current system operates to the advantage of clients and Tier 1 contractors but to the disadvantage of medium and smaller companies
• Late and non-payment of retention monies is a significant issue for some contractors; and
• There is a need to investigate a fairer and more protected approach to assurance in construction contracts.

3. Payment practices in construction

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.

This consultation aims to gather views and information on:

• The effectiveness of existing prompt and fair payment measures for retentions;
• Views on the Pye Tait independent research on retentions in the construction industry;
• Late and non-payment of retentions;
• The effectiveness of existing alternative mechanisms to retentions; and
• The benefit of holding retentions in a retention deposit scheme or trust account.

4. The Scottish Government’s policy landscape

The Scottish Government’s performance assurance mechanism policy encourages contracting authorities to consider assurance methods, including the use of retentions, on a project-by-project basis: the use of retentions is not the default position.

5. Alternatives to cash retentions

• Retention bonds– the contractor’s performance of its obligations to complete the works is guaranteed by a third party
• Performance bonds– the contractor may be able to give a “default” bond to the public authority dependant on the performance of the contract or payment of damages by the bondsman if the contractor defaults
• Parent company guarantees– This is given by a parent company to guarantee the performance of a contract by one of its subsidiaries and can only be given where the contractor is owned by a parent company or is the subsidiary of a larger group.

The Scottish government is open to responses on the consultation until 25 March.