A change to the way UK construction companies deal with contractors may be imminent as MPs get set to debate the second reading of a proposed new Bill later this month.
The Construction (Retention Deposit Schemes) Bill is seeking to ensure retention money (payments to contractors that are withheld for an agreed period of time after the completion of a project) is held in a ring-fenced trust.
According to construction law experts at Manchester firm Slater Heelis, the Bill, if passed, will offer greater financial security to SME construction contractors. Matt Grellier, Head of Construction & Engineering at Slater Heelis, said: “Employers rarely place retention in a separate bank account held on trust. This exposes contractors to financial risk as the money is not ‘ring-fenced’ in the event of employer insolvency.
“The collapse of Carillion has amplified the concerns of many SME contractors. The new Bill proposes that retention monies are placed in a government approved scheme, similar to that which applies for deposits taken from shorthold tenancies.”
According to government figures, almost £8bn of cash retentions have remained unpaid over the past three years and with no ring-fencing in place, retention cash can be used to pay other creditors in the event of employer insolvency, leaving contractors out of pocket.
According to Matt Grellier, even if the Bill is passed, contractors must not become complacent over the terms of contracts into which they enter. He added: “Contractors must still ensure they protect themselves in the terms of their contract to ensure prompt payment.
“It pays to be on your guard in relation to bespoke amendments to ‘standard form’ building contracts. Amendments to provisions regarding payment, defects and time for completion may have knock-on effects on retention release.
“Contractors should risk review payment terms pre-contract formation. Contractual ‘milestones’ in relation to payment should be diarised so that key dates are not missed.”
The Construction (Retention Deposit Schemes) Bill is set to be debated by MPs in the House of Commons on 27 April.