What are cash retentions?
- Cash retentions are monies held back by larger contractors and clients from subcontractors in issues of non-performance arise such as defects arise on work undertaken.
- Money is deducted by clients from payment to their subcontractors, who then consequently hold back similar figures from their own subcontractors.
- In theory, if there are no defects, then the monies are paid in full to the subcontractor in a timely manner. However, the system is known to be widely abused.
- Retentions are on average worth 5% of a contract’s total value, but can be up to 20%.
- Cash retentions are deducted from payments owed in respect of labour, materials and works already delivered and carried out, and therefore legally belong to the companies that carried out the work.
- Thousands of SMEs in the industry wait 2 - 3 years to recover outstanding retentions, which despite the Construction Act routinely get linked to decision, certificates and events, under contract above, but they can be kept for as long as 10 years.
- The value of cash retentions is often higher than the profit margin for work undertaken and sits at an amount which is; a) over the small claims threshold and therefore not viable under the courts system, and b) not necessarily viable under an adjudication.
Who holds retentions?
- Retentions are held by private and public sector clients against their subcontractors, with over £10.5bn of SME working capital locked in retentions annually. Some £7.8 billion of this has been unpaid in the last three years.
- Over £1 billion in cash retentions is owed to 12 of the largest construction companies, according to research from SEC Group.
- Construction giant Carillion held around £800m in retentions at the time of its insolvency (although in total Carillion owed subcontractors around £2 billion).
- Some 84 per cent of public bodies, including local authorities, apply cash retentions on businesses within their supply chain.
- The amount of retentions held by public bodies ranged from 1.5 – 10% of the value of the work.
- Of the public bodies holding cash retentions: 20% invested the cash, 51% used the cash as working capital, 27% left the cash untouched, and only 2% did not draw down the funds until needed.