Jacob Austin 00:00:00 I'll Jacob Austin here from QS.Zone. And welcome to episode 136 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode, number 136, is all about the breaking news of the construction industry's retention ban. This is something that has happened this very week that the construction industry has been wanting, arguing about and campaigning for for absolutely years. The UK government has announced it will ban retention payments in construction contracts, which is absolutely massive and depending where you sit in the supply chain, your reaction is either one of relief finally, or one of dread about what comes next. So in this episode, I'm going to break down exactly what was announced, why it matters what the industry is saying about it. And then I'm going to give you the part that I think is important and that nobody in the press has properly addressed. Because here's the hard truth. A ban on retentions doesn't mean main contractors lose their leverage. It means they look for new ways to get it.
Jacob Austin 00:01:11 And if you're a subcontractor who isn't prepared for what those tactics look like, you could find yourself in a worse cashflow position than you're in today. So listen up and let's get into it. Now, then, retentions that we all love to hate are that percentage of money that the paying party holds back from each payment application. Typically that's 5% during construction, reducing to 2.5% after practical completion, then releasing in full at the end of the defects liability period, which will either be 12 or 24 months, typically after handover. The original logic is straightforward. The client or the main contractor holds back a small percentage of money as an incentive for you to come back and fix defects. If you don't, they can use that money to get someone else to do it. It sounds reasonable in theory to me, but in practice, the system has been systematically abused for decades because the reality is that money your money arguably doesn't sit in a ring fenced account waiting for you. It goes straight into the main contractors working capital.
Jacob Austin 00:02:41 They use it, they invest it, they prop up their own cash flow with it. And then when the time comes to release it, the excuses start. Defects, lists that never close, final accounts that drag on for years, or being bounced around from pillar to post, looking for the right person who can actually pay you that money. And on top of that, upstream insolvencies can swallow your attention before it gets anywhere near you. The numbers are absolutely colossal. The UK government has calculated that late payments are which unpaid retention are a significant component? Cost the economy £11 billion every year. The NFC National Federation of Roofing Contractors estimated that in 2021, £300 million of roofing and cladding subcontractors cash was being held in retention at any one time. By 2023, 86% of their members were reporting difficulties recovering retention on local authority contracts, and 8 in 10 members said retentions were actively affecting their business. So one consequence of all of this is that construction has the highest insolvency rate of any sector in the UK in the 12 months to July 25th, nearly 4000 construction companies entered insolvency.
Jacob Austin 00:04:05 That's around 11 businesses every single day. The government estimated on top of that that more businesses were simply shutting their shop because they weren't getting paid, saying that 38 businesses closed their doors every single day because of that reason. 38. So, quite rightly, when this banner was announced. Reaction across specialist contractors has been really positive because this isn't an abstract policy. This isn't some government target that's never going to be hit. It's the government listening and doing something about a problem. And for many of you listening, it's a problem personal to you. And so on. The 24th of March 26, the Department for Business and Trade announced what it called the most significant overhaul of payment law in a generation. That's a big headline. And the big hitting measure within that headline is the ban on the withholding of retention payments under the terms of construction contracts. But it doesn't stop there because the full package also includes a 60 day cap on payment terms. Large firms paying smaller suppliers will be legally capped at 60 days.
Jacob Austin 00:05:18 That's a hard ceiling, not a target, not a guideline, a real cap. Second, they're introducing mandatory interest on late payments. Every commercial contract will be required to include a statutory interest set at 8% above the Bank of England base rate. That means if you're not paid on time, interest will start accruing automatically by law. They've also introduced a 30 day verification window. So if a main contractor or client doesn't dispute your invoice within 30 days, they lose the right to store payment. That puts the clock ticking on them, not just on you. On top of that, the small business commissioner gets some real teeth because under the new measures, the commissioner will have sweeping powers to investigate poor payment practices, adjudicate payment disputes and fine persistent offenders based on their findings. And these are fines worth tens of millions of pounds for the worst offenders. That's a real incentive to start paying on time. We've also then got board level accountability introduced. That means that large companies with persistently poor payment performance will be required to publish explanations at board level.
Jacob Austin 00:06:35 That then makes reputational risk a boardroom issue, not just something that some guy in the Treasury or the accounts team worries about. And finally, the big one the retention ban. The government chose the more radical path during the consultation, which ran from July to October 25th and received 867 responses. Two options were put on the table. Option one was a full ban. Option two was to allow retentions, but require them to be protected in separate bank accounts or via a surety or bondsmen. 87% of respondents favored one of those two options rather than the status quo, but they were divided about. But whilst they were reasonably divided across those two options, the government has plumped for that ban. It's cleaner. It's simple. It's easy to enforce. The implementation of the retention ban will follow a further consultation, and industry groups are anticipating 12 to 24 months before it actually comes into play. But these are big measures that have been decided upon. And whilst we're not talking about retentions disappearing next month, the direction of travel is set and it's clear and that legislation is coming.
Jacob Austin 00:07:54 The reaction has been really positive across specialist contractor trade bodies, as you probably would expect. The Construction Leadership Council, which has been campaigning for attention to be banned since 2019, welcomed that announcement. Their co-chair, Mark Reynolds, said that the abolition of retentions would be a substantial change in how the industry operates, and also acknowledged that both clients and the supply chain would need time to adapt to it. James Talman, on the other hand, was more direct. The CEO of NFC, he said that for too long, specialist contractors had been forced to operate under a system that allowed larger firms to withhold their money, delay payment and to ultimately use their cash as free working capital. And he called it a landmark moment. The Building Engineering Services Association called it a hugely significant step that has the potential to transform cash flow, improve business resilience and create a fairer, more sustainable supply chain, but not everybody is celebrating. The British Property Federation, which represents clients and developers, said that the ban and I'm paraphrasing, is a sledgehammer to crack a nut.
Jacob Austin 00:09:10 Their CEO, Melanie Leach, said retentions are a vital tool for ensuring buildings are built to the right quality standard, and she warned that a complete ban will particularly affect smaller or less experienced clients, who may struggle to identify defects until it's too late. A senior construction law partner, Mark London at Devonshire, said plainly employers may reach for stricter notice requirements and liquidated and ascertain damages as immediate alternatives. He also flagged the potential for more difficulty in getting contractors to return and fixed defects without that retention leverage in place. The government itself, to its credit, was actually unusually transparent about the risks. It acknowledged that firms at higher tiers of the supply chain could attempt to circumvent the ban by loading payments towards the end of the project and calling this risk material before deciding that the benefits outweighed it. Now, when it says material that means real, that means likely, and that's the government telling you in its own policy documents that main contractors will probably try to game it. And that's exactly what I'm here to talk to you about.
Jacob Austin 00:10:24 The headlines will tell you that the retention ban is a win for subcontractors, and in principle it is. But legislation doesn't just change commercial culture. Overnight, main contractors and clients have had decades of leverage over the supply chain. And they're not just going to give that up without trying to find somewhere else to get it from. There are two tactics in particular that I think you'll start seeing more of. One is already acknowledged by the government, and one is a commercial reality that nobody in the press coverage is talking loudly enough about when he can no longer hold cash as retention. The next logical move is to restructure the payment schedule so that the money you are owed is simply paid later anyway. Instead of 20 applications evenly spread across a contract with a 5% held back each time, you're likely to start seeing schedules where the early applications are front loaded with program requirements, but all of the value gets earned at the back end. The practical effect is the same. Your money arrives late. Just it's no longer called retention.
Jacob Austin 00:11:34 Now, the government acknowledged that directly. They said that firms at higher tiers could attempt to get around that retention band by adjusting payments to later in the schedule. Their position is that that's a real risk, but it's manageable, and I'd encourage you to be more cautious than that. So what does that mean practically, when you're tendering and reviewing subcontract conditions you need to scrutinize your payment schedule. Look at how it's weighted across the program milestones. If 60% of the contract value is tied to the final three four months of a 12 month project, you need to ask why. It's not retention, but it's having the same or potentially worse cash flow starvation effects on your business. And with a lot of work in the current market being undertaken on a lump sum basis, this kind of drawdown adjustment is going to be prevalent. What you want to see is that like the like work attracts the same price, regardless of when it appears on the program. You want to see some kind of alignment between the drawdown schedule and the program of works you'll be completing.
Jacob Austin 00:12:41 You want to see re measurement rates that accurately reflect what the value of the work is, rather than pushing back value to meaningless late on tasks like finishing work and final fixing. I should clarify, I'm not saying those are meaningless altogether, but they're worth less money, so they should be paid on that same value that they're worth, not exaggerated. And meanwhile, up front work pared down in value to stop you earning the money. Also watch for other things that might be introduced, such as completion milestones. I've seen this deployed in a business I've worked for before, where we at the time, as the main contractor, only paid 90% of any piece of work until there was a completion certificate for the whole thing. That was actually in response to, at the time, subcontractors leaving an area of work unfinished by their choice and then trying to charge day works for going back and completing it later, and effectively overcharging for work they should have completed at the time. What I'm talking of here is a completely different matter though.
Jacob Austin 00:13:45 Down valuing valid work for the sake of introducing a late paid completion bonus. Another tactic that I want you to be aware of and to take seriously, because I think this is the bigger risk and it's not being spoken about, is that when you remove retention as a financial lever, main contractors lose what is a relatively blunt instrument, a blunt mechanism. But already in all of the standard contracts they have access to a much sharper one. The quality assessment and inspection process right now, the main contractor is protected to a degree by there being a retention clause. It means that whatever number of insignificant defects there are in your work, they've always got that safety net, that comfort blanket, that they've held a little bit of your payment back to make sure that you complete them post the ban. There's no safety built in and they'll start needing justification to make deductions. They'll also lose the benefit of that part that accumulates as the job goes on. Meaning that if they pay the full value of some completed work because you say you've finished it, and they later discover that there's some small defects in there.
Jacob Austin 00:14:58 They've got no money on you, so they will hold money on you, and legitimately they can do that. So here's what I think you'll see more rigorous and in some cases, deliberately aggressive quality inspections that are timed to coincide with payment applications, snagging lists that grow rather than reduce approaching practical completion. And not just a list of snags, but a list of sums of money held against those snags that they won't pay you until you've completed them. And remember, when you charge to go back in, to go and complete a piece of work, you always charge a premium for it. There's the setup costs, that bit of head scratching time whilst you're working out where to start the moving from one face of work to another, all of those things that you use against the contractor to say why you want to revisit can be used against you in justifying a larger than necessary deduction for either incomplete or poorly completed work. You might also see a rise in alleged nonconformity as being used as grounds for withholding or reducing payments, or instructions to remove and replace work that's arguably contractually compliant but doesn't meet an unstated expectation.
Jacob Austin 00:16:16 When our man Mark London at Devonshire specifically noted there would potentially be a rise in difficulty for employers getting contractors to return and rectify defects. That's the polite version. The less polite version is that disputes over quality will become the new retention meaning rather than suffering the loss of 2.5% of whatever project you're working on. You're much more likely to see the contractor write to you, insist on a defect being completed by a particular date than if you miss that date. Complete it themselves to honour their contract to their client, then recover the money from you as a debt that might be cross contract set off, or it might mean taking you to a small claims court to get a court order. So I actually expect there to be more arguments off the back of not having retention than as if there was a retention in place. There's also another factor to think about, because under the new 30 day invoice verification window, the paying party has to raise a dispute within 30 days or lose the right to withhold. That sounds like it protects you.
Jacob Austin 00:17:25 But if they're raising quality disputes regularly, routinely, and a standard practice to protect themselves from poor quality work, they can use that window to challenge every single application on quality grounds before the 30 days expires. So my advice on all of this is to start building your commercial defences now, before the legislation lands. First, make contemporary records. This is a non-negotiable. Every piece of work should be signed off on site, photographed and logged at the time it's completed, not the end of the month. When you're putting your application together and the site manager's inundated with quality records to sign at the time you've done it. Digital current site records are your best protection against a snagging list that appears out of nowhere six weeks after the work was done. Second, get every instruction in writing. If a main contractor's site manager asks you to do something differently, you ask for that instruction in writing before you start. If they push back, log that you've requested it as a CVI, an oral instruction that becomes a defect allegation later is a commercial nightmare, because you can't prove that somebody asked you to do something different and technically work that is different from the drawings or the spec is a defect.
Jacob Austin 00:18:48 A written instruction changes the specification, and it means that the risk and the cost transfer to them. Thirdly, understand your contractual definition of practical completion. Now, I've long thought that practical completion should be defined for each project. It should be mandated in the standard form with a box, maybe with some suggestions indicating what you should include in that box, but enabling each contractor, each client to state a practical definition of practical completion that suits the particular project. Because practical completion doesn't mean perfect, and it never has. It means that the works are complete for all practical purposes, with only minor snagging items outstanding. It generally means that somebody could work or live in that building without their enjoyment of the use of it being affected by a defect. So if there's a couple of blemishes here and there, whatever. But if the boiler doesn't turn on or the front door doesn't close. That's a big issue. This matters because main contractors may start using inflated snagging lists to prevent practical completion certificates being issued. Some already do, but they may well be using that to keep cash in their pockets rather than yours.
Jacob Austin 00:20:07 And they might also do it to start triggering damages entitlements, which will hurt you long term and permanently, rather than the temporary loss of 2.5%. The records that we spoke about before will help you in this situation. Those records are vital for lots of reasons, but they'll really help you prove that you are complete. If you've got site managers signatures and photographs demonstrating it, then if necessary, you've always got the threat of adjudication and let an adjudicator decide on the strength of my records. Was I finished or not? Fourth and most important point is to review your subcontract terms before you sign them. I've said this a million times. It feels like in this instance, you're looking out for how deductions and alleged effects can be handled. Some subcontract forms allow the main contractor to take deductions without prior notice. Others require a formal notice to be issued, so you need to know which regime you're working under and make sure you're issuing your completion notice on time. And of course, requiring the notices from the contractor if they're stated before you let a potentially invalid deduction be treated as as valid.
Jacob Austin 00:21:20 A final thing that might be worth covering because it will affect how you trade is that with retentions, band clients and main contractors don't just lose their security, they likely need to replace it. And the government acknowledged this directly, saying that the ban will create a need for larger and more sophisticated sureties to support the construction sector. Now, what does that mean in practice? It likely means you'll be asked increasingly to provide retention bonds and defects bonds in place of that cash retention retention bond is essentially a promise from a financial institution, either an insurance company or a bank, that if you fail to perform or fix defects, they'll pay the equivalent of what the retention would have been to the contractor to finish it. This can work in your favor because you keep your cash and the client has their security. But you need to be aware that bonding capacity is not unlimited. Insurers will provide a bond based on your financial standing, your balance sheet, and your track record. As one industry analysis puts it. Bonding capacity is earned, not assumed.
Jacob Austin 00:22:36 That means smaller firms with thin balance sheets may find it difficult and potentially expensive to access retention bonds for large packages that they would otherwise be capable of completing. And if main contractors start requiring bonds on every package, even on smaller value contracts where it wasn't previously standard. The cost of premiums may eat into your margin. It would be worth you having some conversations with a broker early. Get them to help you understand what your bonding capacity is, what you can access, what it costs, and on what terms. Because if you wait until a main contractor puts that requirement into your subcontract before you engage with them, then you're negotiating from a weak position. That was a key takeaway from last week's episode on negotiation. Preparation is the key to success. So let's bring this home. This retention ban is real and these changes are coming. And it does represent genuine progress for large parts of the subcontract supply chain. Thousands of businesses have gone under because of retentions being swallowed by an upstream insolvency, not because their work was defective, not because they failed to perform, but because the system allowed other people to use their money.
Jacob Austin 00:23:54 Until there was nothing left. The CLC and trade bodies have been pushing for this for years and the government has finally listened to it. But, and this is the message I want to leave you with. Legislation changes the rules, but it doesn't change the culture. Main contractors who have relied on retentions of free working capital as that safety blanket, and as a commercial lever over their supply chain, will adapt to that. They'll potentially back load payment schedules, they'll tighten quality regimes, and they'll try to find new reasons to raise disputes. At the moment, your application lands, so the best thing you can do is not be surprised by that. Build a system that generates quality sign off. It generates records. It demonstrates your work was complete and it was free from defects. Get to know your contracts and get instructions in writing. The game is going to change, so it's time to make sure you're ready for the next version of it. I hope you've enjoyed today's episode, and more than that, I hope this change in regime brings you the positive benefits that everybody's been campaigning for.
Jacob Austin 00:25:04 My mission with the show is to help the million SME contractors working out there in our industry. If you're taking some value away from today's episode, then I'd love it if you'd share the show and pass that value on to someone else who'd benefit from hearing it. And of course, subscribe yourself if you haven't already. And thanks for tuning in. If you like what you've heard and you want to learn more, then please do find us at www.QS.Zone for more information. And remember, miss the contract detail and the commercial risk lands on you. Thanks all. I've been Jacob Austin and you've been awesome.
