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Retentions on the wane

AGENDA - Retentions are a much resented burden on all types of contractor. But a Construction News survey shows there are more councils prepared to partner with firms and cut back their use of the practice. Russ Lynch reports

CONTRACTORS hate retentions. The common clients' practice of holding back 5 per cent of the cash owed to firms for their work hits cash flow, causes friction and means there is less money around for training and investment.

Above all, it suggests the industry is so inefficient and shifty that automatic deductions are necessary just in case the contractor refuses to come back to fix the defects which inevitably crop up in building work.

The issue has been at the centre of one of the biggest construction lobbying campaigns in recent years, with MPs on the House of Commons' trade and industry committee arguing the practice was ill-suited to industry efforts to improve through greater collaboration.

Although its findings were largely ignored by the Government, a Construction News survey using the Freedom of Information Act has found that the message on retentions is seeping through to local authorities.

A survey of 50 English councils ? to which 36 had responded at the time of writing ? found that 31 councils were holding almost £27 million from contractors on construction projects (see table below) as of the beginning of last month.

But several are moving away from the practice and letting more work through retention-free frameworks.

This is a significant development considering councils in England are responsible for £12 billion in construction spending every year.

The bigger councils are leading the way, with Manchester emerging as the star performer. While holding £1.9 million in retentions, the council has set up two education frameworks which will see more than £200 million spent retention-free.

Just as significantly, it is setting up a small works framework for jobs less than £500,000 with a £20 million-a-year spend shared between up to eight firms.

Procurement manager John Finlay said: 'Other developments may follow that could make us a totally retention-free client with respect to construction work.' North Tyneside Council is also leaving retentions behind, having set up a nil-retention deal in 2001. It holds just under £100,000 on retentions in 66 schemes not covered by this. St Helens ? a Rethinking Construction beacon council ? has let £17.8 million of construction work without recourse to the practice.

When Construction News analysed council tendering in a similar exercise last year, it found a depressing 80 per cent of contracts large and small still being won by the lowest price. But there are more grounds for optimism on retentions.

Peter Bishop, the director of the Local Government Task Force, agrees. He said: 'I think overall the signs of improvement are there ? this is not something which will happen overnight.

'It's daft not to expect councils in charge of public money not to want some form of hold over their companies but if the relationship and trust is there the retention is useless.' The survey has also highlighted a few blips. Many of the councils surveyed ? such as Bury, Gateshead and Calderdale ? automatically return retentions to contractors at the end of the defects period, but others sit on the cash until companies claim it.

South Tyneside is holding on to nearly £400,000 for want of claims, while Rotherham has nearly £300,000 in the coffers despite letting more recent construction deals on a nil-retention basis.

But overall a surprisingly small amount ? just over £1.7 million of £27 million among 31 councils ? is either unclaimed or being held back in rows with construction firms.

So are they really needed? The Specialist Engineering Contractors Group has long argued for the abolition of retentions as an outdated practice which hampers the industry's development.

But the findings hint at some progress from SEC's own survey of local councils two years ago. They found that some authorities were using retentions to reduce borrowing, aid cash f low and indirectly fund capital projects ? which the SEC condemned as 'tantamount to fraudulent misuse of funds'.

Rudi Klein, the SEC's chief executive, said: 'There is more encouraging findings here but the question is whether the contractors involved are passing on the nilretention policy down their supply chain. Otherwise you are just moving the process down a rung.' While falling short of compulsion, the Local Government Association has published guidance saying that councils should steer away from retentions where the trust in the contractors to do a decent job is there.

But the SEC has never accepted the link between defects and retentions and indeed argues that contractors are more likely to do a bad job if cash is being withheld.

On the broader national scene, the organisation is calling for a cull in retention payments to echo progress in delivering zero-defects construction work.

At the end of last year, the Office of Government Commerce published figures from its Achieving Excellence in Construction programme which showed 60 per cent of Government construction work by value being delivered defect-free as of March 2005. Their target was 70 per cent, but it would be churlish not to acknowledge the progress made.

And if the industry is delivering 60 per cent of work without defects, then is it realistic to look to an end to retentions in the near future?

Professor Klein believes so. He said: 'We have got to a point where the OGC believes in principle that retentions should go centrally and the figures point to an improved performance among local councils. It is hard work but it's beginning to pay dividends ? and industry and clients will benefit as a result.'