A Scottish member of the United Kingdom’s Parliament, Alan Brown MP, recently secured a motion to debate the issue of retentions in the UK’s construction industry.
In the debate on 26 April 2016 Alan Brown MP highlighted the impact the practice of unsecured retentions can have on the those “at the downstream end of the construction industry.”
Mr Brown observed that a survey of SMEs found that 25% stated that a debt of £20,000 or less is enough to jeopardise their business prospects – and amounts owed as retentions are much higher than this. Further, Mr Brown pointed out that banks do not allow borrowing against sums due to companies.
By way of solution, Mr Brown suggested the approach to be taken should be the same as the UK’s tenancy deposit regime, where landlords must place tenants’ deposits in a government backed tenancy deposit scheme.
New Zealand has grappled with this recently, taking the option of the retentions trust regime under the Construction Contracts Act 2002 to address the issue. The retentions trust regime recently came into force, and some construction contracts where retentions are required to be held on trust would already have been entered into.
While New Zealand enacted the retentions trust regime as a reactionary response to the Mainzeal collapse (and the $18.3 million in subcontractor retentions that went unpaid as a result), the United Kingdom are in a position where they have the opportunity to secure retentions before a large scale insolvency event. To put it in perspective, according to Specialist Engineering Contractors’ Group (a construction representative body) the UK’s top 12 construction companies are collectively owed over £1bn of cash retentions.
While the impact of the new trust regime remains to be seen in New Zealand it will be interesting watching a comparative jurisdiction go through a similar process in the coming years – particularly if they reach a different, more effective, method of securing retentions.