Publication of NEC/CLC Guidance on Retentions

On 15 November 2022, the Construction Leadership Council (“CLC”) and New Engineering Contract (“NEC”) published joint guidance to the construction industry (“the Guidance”) on how to minimise the use of retention funds in NEC works contracts. Beale & Co’s Andrew Croft was happy to contribute and be involved in developing the Guidance, which can be found here in full.

A retention fund is an amount of money withheld from a contractor until a job is complete, intended to provide security against the insolvency of businesses in the construction chain. The UK government estimates that up to £6 billion is held in construction retentions each year in England alone, which puts unnecessary cashflow pressure on contractors and their supply chains.

The Guidance develops this idea and asserts that retentions can often create problems for businesses throughout the supply chain due to the late and non-payment of retentions or through upstream insolvency.

After introducing the idea of minimising the need for retention clauses in construction contracts, the Guidance discusses:

• the current NEC approach, namely the optional clause X16 to use a retention fund as security for the client rather than the prescribed use of a retention;
• the process under NEC to correct any defects in the works, including the need to correct them within a specified correction period and issue a Defect Certificate; and
• the different approaches that can be adopted under the NEC to pay for work which is found to be defective, none of which need a retention fund.

The Guidance concludes that retention funds are often unnecessary, particularly under an NEC contract if there is careful drafting of the requirements for achieving completion and the selection of a contractor with a reputation for the quality of its work. It also points to the wider potential commercial benefit for the client if they make it clear that a retention will not be required from the outset, in that the works may be provided at a lower cost than would otherwise be the case.

Comment

The Guidance will hopefully be welcomed by those in the construction industry, especially those who have suffered from retention practices in the past. It should go some way in achieving the CLC’s goal to move to zero retentions in construction contracts by 2025, and help to eliminate problems being faced by parties surrounding cash flow, administrative burden and the risk of non-payment due to contractor insolvency. The Guidance will work alongside initiatives such as the Build UK ‘Roadmap to Zero Retentions’, which are endorsed by the CLC.

Steve Bratt, chair of CLC’s business models workstream, said that retention funds ‘can be avoided through good contract management and selection of contractors with a good track record of quality work’, and Peter Higgins, chairman of the NEC4 Contact Board, agreed and said that holding retention funds ‘creates an unnecessary expense for the contracting parties’.

NEC will be arranging a free webinar on Monday 16^th January 2023 at 2pm to support the new Guidance and give NEC users an opportunity to learn more about how to minimise the use of retentions. Details on how to register will be posted here in due course.