Why we need to start adapting project bank accounts to ring-fence retentions

Why we need to start adapting project bank accounts to ring-fence retentions
As I mentioned in my last editorial, it is over 5 years since the UK government published its consultation report on reforming the practice of withholding cash retentions (BEIS, 2017). It confirmed that contractors lose hundreds of millions of pounds of retentions each year due upstream insolvencies.

The consultation focused on three options: retaining the status quo, publishing more guidance, or ring-fencing retention monies in a secure pot. The overwhelming majority of respondents voted for the last one, but the outcome of the consultation has not yet been acted upon.

NEC has done its bit by drafting excellent guidance which was published last year by the Construction Leadership Council (CLC and NEC, 2022). There is now an opportunity for NEC to take matters further as there is renewed interest within the UK’s devolved administrations in reforming the retentions system.

Recently the Scottish government published guidance for contracting authorities urging them to protect cash retentions within a trust arrangement. The Welsh government is considering a similar policy for Welsh contracting authorities.

Using project bank accounts


In the light of these developments, we should perhaps consider an addendum to the NEC project bank account option Y(UK)1 when a cash retention is required. In principle there is no barrier to keeping a retention in a project bank account − after all, cash retention is effectively a deferred progress payment.

A tier 1 contractor’s retention is a combination of its own retention and that gathered in from its supply chain. It is only necessary that the tier 1 contractor identifies those named suppliers which have contributed to the project retention and in what proportion.

Certainly ring-fencing cash retentions in accounts protected by a trust is the favoured solution in many common-law jurisdictions, including states in Australia and the USA. I would be interested in hearing from any NEC users who currently use a project bank account or similar device to ring-fence retentions.


References


BEIS, 2017 Retentions in the construction industry: BEIS Research Paper 17
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/654399/Retention_Payments_Pye_Tait_report.pdf

CLC and NEC (2022) NEC and CLC guidance for dealing with retention payments under NEC3 and NEC4 contracts. https://www.neccontract.com/getmedia/d11c808f-b232-4af9-979a-82b94be8d7ff/NEC-and-CLC Guidance-for-Dealing-with-Retention-Payments-Under-NEC3-and-NEC4-Contracts-Final-9-11-22-1.pdf

Recent Projects

Recent news

How the Ministry of Justice is using NEC Contracts under a Framework Alliance Contract to deliver its new prisons programme.

How the Ministry of Justice is using NEC Contracts under a Framework Alliance Contract to deliver its new prisons programme.

The Ministry of Justice (MoJ) has embarked on an extensive programme of works to deliver 20,000 much needed prison places across the country.

NEC4 ECC time provisions – an introduction for new NEC users

NEC4 ECC time provisions – an introduction for new NEC users

It is often said that time is money, and nowhere is this more true than in construction contracts. The NEC4 Engineering and Construction Contract (ECC) regulates time in several ways.

How to choose between the NEC4 TSC and NEC4 FMC

How to choose between the NEC4 TSC and NEC4 FMC

The value of the UK’s facilities management (FM) and maintenance sector is set to reach £52 billion in 2026.

View all news