For Sub-Contractors
The UK Retention Deposit Scheme is an independent scheme for the protection of retentions under construction contracts.
We provide segregated bank accounts for construction retentions under standard-form and bespoke construction contracts in England and Wales.
For Sub-Contractors
As a Sub-Contractor (or sub-sub-contractor), you take the most credit risk in the construction supply chain. The insolvency of the Employer, someone you may know little about and have no direct access to, could mean that your Contractor does not receive their retention, and therefore lead to trouble with you recovering yours.
How does the retention affect the Sub-Contractor?
Find out more about What is a Construction Retention?
The underlying purpose of a construction retention from an Employer's perspective is to ensure the completion and quality of the construction project by the Contractor. From a Sub-Contractor's perspective, this often means that your Contractor will levy or withhold some sort of retention under your Sub-Contract as well.
This retention at 3-5% of a project's gross value can constitute a significant proportion of the profit likely to be made on your Sub-Contract. While many Sub-Contractors will receive their retention payments (eventually), there are significant risks to a Sub-Contractor in allowing a Contractor to withhold retentions and hold onto the cash themselves.
What are the key risks to a Sub-Contractor in the withholding of retention payments by the Contractor?
In addition to the Sub-Contractor having to carry the risk of the Contractor's solvency beyond completion of the works (perhaps one of the more obvious risks), there are further risks to the Contractor that might be less apparent on first review:
Knock-on Effect of Employer Insolvency / Dissatisfaction
Being one step removed from the Employer (the ultimate end client) means that Sub-Contractors tend to have very little ability to control the timing of the release of the Contractor's own retention. It might be, for example, that the Employer is withholding payment of the retention pending the remediation of snagging or defects that have nothing to do with the Sub-Contractor at all, but which mean that it is inadvertently prejudiced and unable to receive its own retention from the Contractor.
Cash Flow
The withholding of retention payments of 3-5% on a monthly basis can weigh on a Sub-Contractor's cash flow, but most Sub-Contractors assume this and plan their projects, overheads and profit accordingly. On a monthly basis, therefore, the withholding of the retention often doesn't cause that much harm.
Following practical completion, however, Sub-Contractors bank on the swift release of retentions, not least because they are required to release their own sub-contractors' retentions at the same time. If the Employer delays in paying (or is unable to pay) the retention, that is not an excuse for the Contractor not to make its own payment of retentions to its sub-contractors. Nevertheless, while 'pay when paid' may have been long outlawed in the United Kingdom, most Contractors will withhold payment of sub-contract retentions until they have managed to secure the release of their own retentions upstream.
For SME Sub-Contractors, a delay in the release of retention can hinder the ability to cover ongoing operational expenses, pay suppliers and sub-contractors or even manage payroll, potentially jeopardising the overall financial health of the Sub-Contractor and its ability to perform on other projects, both for the Contractor and for other contractors.
Tension & Disputes
The first release of retention is generally timed to coincide with practical completion (or the equivalent under the contract) of the project. This is the point in time at which the parties will usually be discussing any lingering defects or snagging - the Contractor will be hoping for a prompt release of its retention (potentially in order to cash flow the snagging remediation) and the Employer will be planning to withhold it until they are satisfied with the results. Until they have sorted out their own issues, however, the Sub-Contractor will often have to wait...
This sort of tension can erode trust and cooperation, potentially leading to disputes and a strained working relationship, which can affect the project and all future projects. Disputes over retention payments can lead to costly and time-consuming adjudication and dispute resolution.
Sub-Contractors may need to invest significant resources in legal fees and administrative processes to secure the release of the withheld funds, diverting attention and resources away from productive activities.
Are there any benefits to the Sub-Contractor for the construction retention being deposited with a third party?
Absolutely. Where the parties to a construction contract elect to use a Retention Deposit Account, the retention is released (in accordance with the Retention Deposit Scheme Rules) automatically to the Sub-Contractor on production of the relevant certificate under the construction contract.
Generally-speaking, this happens within 2 business days, so the Sub-Contractor can plan its cash flow and expenditure accordingly.
In the event that the Contractor does not certify practical completion, or does not agree to the release of the retention, almost all construction sub-contracts in the UK are required, under the Housing Grants, Construction and Regeneration Act 1996 (often called the 'Construction Act'), to include provisions permitting disputes to be solved by way of adjudication.
Once a Sub-Contractor secures an adjudicator's award confirming that it is entitled to the release of some or all of its retention, it can produce that award to us and we will pay the retention in accordance with the adjudicator's decision.
What does a Contractor need to do to open a Retention Deposit Account?
Opening a Retention Deposit Account is both straightforward and quick. Find out more about How It Works, or log in to your account to open a new Retention Deposit Account.
Where can a Contractor find more information on Construction Retention Deposit Accounts?
We have lots of resources available to Employers who would like to find out more about Retention Deposit Accounts:
