November 30, 2023

Regulatory changes to retention payments and what it means for construction businesses

The construction industry faces a significant regulatory update in light of recent Government proposals concerning the Reporting on Payment Practices and Performance Regulations 2017.

This change, particularly focused on retention payments, is set to have profound implications for the sector.

Retention payments

In the construction industry, retention payments represent a significant portion of contract dealings.

Essentially, these are funds withheld from a contractor or subcontractor to ensure all work is completed satisfactorily.

Typically, this involves holding back a percentage of the contract value until a project reaches completion or, in some cases, beyond this point to cover any potential defects.

While this practice offers clients security against subpar work or potential defects, it poses challenges for smaller businesses in the construction supply chain, primarily due to delayed cash flows and the risk of non-payment, especially in cases of insolvency.

Reporting on payment practices

The Reporting on Payment Practices and Performance Regulations 2017 was a step towards transparency and fairness in business transactions, requiring large companies to publicly report their payment practices and performance.

These regulations aim to provide a clearer picture of the payment culture within large companies, thereby allowing suppliers to make informed decisions.

However, the original scope of these regulations did not extend to retention payments, a critical element in construction contracts.

Government consultation and industry response

Recently, the Government proposed an amendment to include standard retention payment terms in the payment practice and performance reports for qualifying construction contracts.

This proposal was put forward for consultation, seeking industry input. The response was overwhelmingly supportive, with 92 out of 122 respondents strongly agreeing and an additional 11 in favour of including information on standard retention terms in these reports.

This feedback emphasises the call for greater transparency and accountability in retention payment practices.

Implications for the construction industry

Incorporating retention payment terms into the reporting requirements could revolutionise the construction industry’s financial landscape.

Smaller businesses in the supply chain would gain a clearer understanding of the financial risks associated with specific projects, allowing for better-informed decisions and financial planning.

This transparency could potentially curb the abuse of retention payments and alleviate some of the cash flow issues plaguing smaller contractors and subcontractors.

Anticipating regulatory changes

As the construction industry anticipates these regulatory changes, companies must prepare for increased scrutiny and transparency in their financial dealings, particularly regarding retention payments.

Firms will need to reassess their contractual practices and perhaps even their approach to handling retention payments, ensuring compliance and demonstrating a commitment to fair business practices.

Our team of solicitors are experts in construction law and can help you navigate the proposed changes to retention payments and ensure you remain do not fall foul of the new measures. Contact us today for further guidance.