February 15, 2023

NEC users should reform their use of retention funds

News Article

Have you recently taken out an NEC contract? You need to consider how retention funds could affect your project.

Retentions on a contract enable the owner of a project to hold back payment until the project is completed sufficiently and provided that any snagging is resolved.

This system can have benefits as it can help projects make good progress. However, it can also cause problems as payments can be held back unfairly. Retention funds remain and form a part of the Contract Sum owed to the contractor and can only be used in specific circumstances for example, the rectification of snagging items when the contractor has not done so.

What is the impact of retentions in the construction industry?

Between £3 billion and £6 billion of retention money are withheld each year in England. This is becoming a notable issue with the industry facing pressure surrounding costs.

The Government has recently published a report on the growing impact of retentions on the construction industry. The report concluded that retentions has little impact on improving the quality for the supply chain, the impact of this is often severe causing a large amount of disruption to projects.

The research found that £230 million worth of retentions had been lost as a result of insolvencies.

The Government is now considering whether or not to ban the use of retention in construction contracts.

What guidance can you follow?

The NEC have formed a partnership with the Construction Leadership Council who have published guidance on the use of retentions for NEC contracts.

The NEC takes a proactive approach to the management of risk during process of construction and enables issues with quality to be addressed early on in the project.

How can you safeguard retentions?

There has been a rise in insolvencies in the construction industry so ensuring to safeguard payments is important in continued progress.

The NEC published the fair payment agenda which is a standard documentation on project bank accounts. This details the guidance of retentions.

If you need advice on construction contracts including NEC contracts or retention funds and how this could affect your project, please get in touch with our Head of Construction Law, Adam Davis for more information.