Retentions Are Costing the UK Construction Industry Up to 💰 £5 Billion a Year!!

Retentions have been used in UK construction since the 1840s. Yet today, many in the industry are questioning whether they still offer the security they once promised.

Originally introduced during the railway boom, retentions were meant to protect projects. Today, they’re locking up billions in unpaid funds and pushing contractors closer to insolvency. In fact, it’s estimated that £3 to £5 billion is held in retentions across the UK construction sector each year, with much of it never recovered.

In this episode, we sit down with Gary Ashton, Partner at Hawkswell Kilvington Solicitors which is one of the UK's few law firms focused solely on construction and engineering. Gary explains how retentions work, why they often go unrecovered, and what legal tools contractors have at their disposal.

We talk about:
✔️ How retention works in the UK and why it's so widely used
✔️ The legal and financial risks retentions create during insolvency
✔️ Why better contracts and clear payment terms matter
✔️ Alternatives like escrow accounts, project bank accounts and retention bonds

If you have ever lost money on a project or struggled to recover withheld payments, this episode offers practical insight and expert advice from someone who sees the impact every day.

Learn more about HK Legal here: https://hklegal.co.uk

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Transcript

Join us for your weekly deep dive into the beating heart of UK construction. From groundbreaking projects to game-changing innovations, the UK Construction podcast brings you face-to-face with the industry's brightest minds and boldest thinkers. Each episode features candid conversations with construction leaders,  architects, engineers and on-site experts who share their hard-won insights and behind the scenes perspectives. We cut through the noise to deliver actionable intelligence on market trends, emerging technologies and the forces shaping British building.  Gary, welcome to the podcast today. Thank you very much for joining us. Hi, Tom. My name is Gary Ashton.  I'm a Solicitor and a partner in the firm of Hawkswell Kilbinton Solicitors. And  we were a niche firm of um Solicitors, which just provide focus  purely on providing legal services to the m construction and engineering industries in the UK. oh And my sort of focus is providing advice to clients um on managing risks.  construction projects and resolving disputes. So that's just a little bit of background. Cool. And where are you guys based? We're based in Leeds, although we do have a London office, which is actually due to open next month. We've got a new office there, predominantly based in Leeds, but we do work for domestic and multinational clients. on projects throughout the UK  and beyond. So we have a fairly long reach, but as I say, we're  basically one of only a handful  of uh firms in the country which just, you know, so focuses on providing  legal services to construction and engineering industries. So we're  quite focused in that regard. it  could involve anything, you know, it can involve anything from I don't know, know, bridge building to house building to,  you know, any kind of infrastructure project  or,  you know, civil engineering, the full  spectrum basically. Cool. And kind of what, what kind of projects have you guys worked on in the past and things?  we've worked  on? A wide variety. Stuff that you may have heard of is the Mersey Bridge,  which was recently built. dealt with  a number of disputes on there between contractors and subcontractors. It's quite interesting actually, due to, you know, get to see a lot of the technical side as to how they build these bridges, you know, the foundations and what have you. We're doing a lot of work at the moment in relation to building safety. So obviously you'll have heard of Grenfell. Of course, yeah. And the disaster there. So obviously off the back of that, the UK government are now pushing ahead with  remediating all the effective buildings  in the UK, high rise.  So we're doing a lot of work  on that side. we're working with contractors or house builders  or,  you know,  various parties within the supply chain to basically help them remediate buildings and deal with, you know, the fallout from that. So there's quite a lot of activity in that particular area. uh Yeah,  yeah, so  huge project. Well, Scope and Project Works, isn't it? Yeah, I know  even where I don't live in London at present, but I used to live in North London and there was at least three tower blocks uh within eyesight of where I lived. Yeah. We had to have the cladding removed.  And strangely enough, I read in the papers the other day, so I lived there for about six years. uh there was always scaffolding across these buildings. So the disaster happened before I moved there.  In six years, the scaffolding never got removed.  The cladding got removed, new cladding got put on,  and windows, they started to take down the scaffolding, and then they realized they'd fitted all the windows backwards. aah And so  these poor residents who, as I say, well, it's at least six years since I was there,  the scaffolding's never come down from these buildings.  I mean, these things, they take years actually to get resolved.  Mainly because as well, these projects were carried out, you know, decades ago.  trying to track down, you know, original documents and the original passes that were involved  is quite a task in itself. So  yeah, there's still a hell of a lot of work to be done in that area.  And were you guys involved in Grenfell at all with any of the post- weren't directly in the Grenfell inquiry, but  obviously  everything that's come out of the inquiry directly impacts upon the projects that we're  working on. So obviously we've had to abreast of all of that.  But I think it would quite a few years before.  before this is all resolved. I bet. So yeah.  But  generally,  we're busy with a variety of projects,  as I say, that can vary from road  building to hospitals to  purely  residential. So  a  big spectrum of  work, obviously. Yeah. Have you seen much of an impact since the change in government in your work? Well, what we're hearing from clients is things have slowed down since the budget in terms of projects coming online and going ahead. There's been quite a significant sort of hiasis with projects, whether that's because people were waiting to see what was going to happen, you know, with the autumn budget or whether the, you know, the changes that have been brought in in the budget have impacted on certain events. I mean, obviously there are problems with the the new  regulatory regime for obtaining your permissions for building your new high rise developments. know,  again, off the back of Grenfell have introduced a new gate, what they call a gateway regime, but there's a big backlog of cases being wasting to be dealt with by, you know, the planning and building control inspectors. So apparently that's causing a big problem at the moment, know, web projects are just stalled because you know the waste of permission to go ahead so it's a big problem but I mean the government said they're putting more resources into it but  these things take time it's complicated oh so yeah that's kind of what we're hearing at the moment. And what about on the house building side of things? So was expecting you to say the opposite I was expecting you to say yeah things like you got busy with all the new building targets.  I mean I do think  you  You know, we are starting to see now, you know, certainly the house builders are pushing forward in terms of moving ahead with projects in terms of getting permissions and what have you, because obviously the government is very pro house building now.  you know, it's a big drive for getting more, more properties on the market. But as I say, I think the, the impact from, you know, some of the measures it brought in with the national insurance, you know,  I think has certainly had a bit of a dampening effect on construction. But we'll have to see how that plays out. And then obviously you've got the Trump effect at the moment. yeah. With the tariffs and what have you. So you just don't know what's around the corner at the moment. It seems to change like the wind at the minute with the Atlantic. What's your gut feelings on the actual... I know you're probably not an expert in this specific area, but  with the Labour government's house building targets. I think that they're definitely adventurous.  I think they'll probably struggle  to achieve them.  I do think they definitely will be an increase because clearly they are  putting in measures in place or getting away, doing away with red tape to try and push housing forward. I do think there will be  overall, think ultimately it will increase.  But whether they actually achieve the targets is another matter mainly because there's a shortage of skills and trades. Absolutely. Which  is one of the biggest problems.  That's something that I needs to be addressed. ah I do think there needs to be more, perhaps more emphasis on  technical colleges and... you know, people going into trades generally.  uh, yeah. Even, uh, just on, uh, my own perspective, just trying to get a plaster around, uh, for the past few weeks has been, uh, yeah. Well, I've almost given up hope and, uh, starting the course myself now just to get it done.  Yeah.  had, um, recently I had a house, just a small house extension, but just trying to get a builder  was so difficult. you know, just difficult. Absolutely. I haven't even been able to get anyone around to do a quotas yet. I think it's getting people to come and quote. Yeah. Almost impossible. It seems. Yeah. Yeah. It's crazy. Yeah. We digress anyway, but the, uh, with, uh, uh, your company you work for, so HK legal, um, understanding is you're, you the specialist to do with the retentions within the company? Yeah. Well, There are other people within the firm that deal with this particular area, but I do deal with retention disputes. So in terms of retention. Sorry, just to interrupt, could you, for anyone who doesn't know what retentions are, could you explain them just for our audience? Yeah. So most building contracts or subcontracts entitle the employer. So wherever the employer is under that contract to keep a percentage of the value of the work carried out until completion of the project or until what they call making good defects. And that's generally referred to as retention and then payment of the retention is known as release of the retention. typically what will happen is as the job is being built, the employer will retain say 5 % or 3%. That's usually the most common percentage from the value of the work carried out.  And then when the job's completed, so when you get to practical completion, the employer should release the first half of the retention. So let's say it was 5%, they should release the two and a half percent that's been retained. And then you'll normally have  what they call a rectification period or a defects liability period. And that runs usually for 12 months,  can be longer from completion. then during that period, if any snags  or defects come up, then the contractor's meant to go back and put them right. And then at the end of that period, the remaining retention is released. So the remaining two and a half percent or one and a half percent, which it usually is. And  the main purpose of it is to provide security. for  the employer or the main contractor in the event that the contractor or the subcontractor doesn't complete the works or they fail to come back and fix defects. So that's essentially it.  It's pretty widespread  in terms of its  use  in the UK construction industry. We were first introduced back, it was when they were building the railway systems back in the 1840s.  that they introduced  retentions. And then since then it's just become, you know, embedded within the construction industry. So  it's widely used now.  Is it used in other countries as well? Is it like a UK specific system  or? No, no,  they do have it in other countries. They do have it there. Although they can do things differently in  different jurisdictions.  So. For example, in America, generally tend to use retention bonds,  which is something we can  talk about today, which is a different form of security. In other countries such as Australia, New Zealand, for example, they do have retentions,  albeit they tend to be retained separately in a separate account. they, you know, the money's put somewhere safe, so to speak, um you know, in case there's an insolvency event. But yeah, they are used throughout the world, but especially in the UK, they're a very common feature of construction projects. Pretty much, well, I would say nearly virtually 99 % of the contracts I see will have some kind of retention. There's probably only the lift industry, which has its own. they don't tend to operate retentions and they have like an  insurance backed scheme. That's quite specific to the, the lifting industry. That's, that's, that's sort of the type of thing. And are there any like specific, is there like a certain type of threshold  project has to certain criteria for these retentions to be used?  Just depending on the kind of contractor or employer or? Yeah, it just depends.  Generally speaking, if  it's,  you know, of any sort of reasonable value, then  you will usually see retention, you know, some, you know, if you're talking, I don't know, tens of thousands of pounds, then  you will still  see your attentions on those type of contracts,  even as low as that type of value.  So yeah, you see it across the board. It's only really if they're very low value, you know.  low value that you won't see it. You do see a difference in terms of how much retention gets retained. So the standard, what you tend to see is 5%, but you can see 3 % or, you know, variations on that. But generally speaking, it's either 3 or 5 % across the industry. And that's just dependent on the particular project and the employer and the contractor. Yeah, exactly. Some standard form contracts. You know, they specify a particular percentage, 5 % or 3%, but it's purely really just up to the parties who are agreeing the contracts. Generally speaking though, it's kind of accepted that it will be at least 3%, but most commonly it tends to be 5%. Okay. And the money is not sitting in a third party account or anything? just the employer just retains it, I assume, as the name suggests. And this is one of the problems really with retentions. This is the major downside of it is that I would say, you know, largely speaking, the retention money is just retained by the employer or the main contractor and it sits in their bank account with the rest of their finances. And the problem with that is if anything happens, you know, say the contractor or the employer becomes insolvent, then the money is just there sat in the same pot  and it like, know, generally speaking, it gets lost  or at best it would go into the pot to pay creditors. But in my experience that rarely happens. You know, there's been some pretty high profile insolvencies over the years. I mean, you probably  will remember Carillion back in 2018.  went under, you know, owing millions of pounds in retentions.  And more recently, ISG  last year, where again, they went under, owing millions of pounds.  And this is a problem you see that the retention money is not ring-fenced. So if an insolvency event occurs, then the party that is owed the retention generally loses out.  You know, we do see that  first hand when there is an insolvency event. I think that's probably one of the  main downsides with retention. It tends to be wasted in favor of the party holding the retention money. I can imagine.  As opposed to the party, you know, which pays it.  And then so it just gets eaten up by the liquidation process and...  Yeah. ...the directors, I guess. Yeah. I mean, it depends obviously how much the contractor or  the party, the insolvent party, how much, you know, how much the... debts they've got when they become insolvent. But for example, ISG,  they, from what I've seen in the press, they owe millions of pounds. So the chances of you guessing anything, you know, in terms of a payout from the liquidators is  pretty slim.  And they would be owing money to the tier two contractors, is it? They would obviously. Say for example, if you took ISG, they're tier one, so yeah, they would owe the money to tier two, but then it obviously cascades down. So the tier two contractor will owe money to the tier three contractor, so on and so on. So  it cascades down and then you get a domino effect where the main contractor may go bust,  but it can have a massive effect on the whole supply chain because nobody gets paid and it trickles down. It can be huge. Yeah. And now a quick word from our sponsor Webmotion Media.  Are you ready to transform your online presence? At Webmotion Media, we're not just another digital agency. We're your partner in digital success. Our expert team delivers results driven SEO that puts you at the top of search rankings, stunning web designs that convert visitors into customers and data backed PPC campaigns that maximize your ROI.  Plus our conversion rate optimization. ensures every visitor counts. Don't just take our word for it. Our clients see an average of 40 % increase in online revenue within the first six months. Ready to elevate your digital game? Visit our website from the links below this video or call us today for a free consultation and let's turn your digital dreams into reality. and the loyal subcontractor, you know, it can be quite significant amounts. It can be hundreds of thousands of pounds in resension, depending on the value of the contracts it can affect. Especially if say, you know, you've got a relationship where you've got a subcontractor and a main contractor where they do a lot of business together and they work a lot, you know, work on a high number of projects. Then, you know, where you get an insult and see the event there, it can be devastating because it could be you know, some quite significant amounts of money owed.  I can imagine.  Yeah. I've seen that.  Is there any better way to do this kind of thing? Like maybe hold money as you mentioned before in some sort of like ring fenced kind of escrow account before a project kicks off or? Yeah.  Are they fit for purpose, these retentions? I guess it depends where you sit in the, you know, on which side of the fence you sit. If you're the party holding the money, then you probably you're probably quite happy with the current system. Whereas for the  party, say if you're a subcontractor that has to pay the retention, then it's  probably not quite as em attractive in that respect.  I do think it's probably wasted in favor of the party holding the money. They sort of hold all the cards. I mean, there are different options. There are alternatives to...  having a cash retention, for example, you could have a project bank account,  which is basically bank account set up in joint names. So you'd have the name and the contractor on the account, and then you'd have any other parties  within that supply chain named. And then the money within that account can only be paid to those subcontractors  that are named. therefore,  It's good for speeding up cashflow  and it avoids the pitfalls  associated with insolvency. So if the contractor goes bust and money's still there, it's still a event,  which is obviously the biggest problem with insolvency and retentions.  There's retention bonds  as an alternative. could have  basically where you provide what they call a retention bond and it just provides security for the retention. The only problem with those is it they can be expensive and they can tie up the contractors' finances basically. And they do tend to be more difficult for smaller contractors to obtain. There's also  trust accounts  or escrow accounts, is  basically an account where the retention monies are held separately from the employer's other funds.  It basically just increases the chance of you getting your retention if the employer becomes insolvent.  escrow accounts, they're just the same really as trust accounts except they're administered by you know a solicitor or a bank or some kind of financial institution. I mean they all have pros and cons you know the alternatives some good sides downsides and none of them are really widely used within the industry.  What you tend to find is they're used in addition to the retention so  not only will you have  to give a cash retention, you're also having to give maybe a bond or  repair and company guarantee.  You do see  alternatives, but as I said, they tend to be in addition to the retention as well. So it's  kind of extra security if anything. Yeah. Is there anything that contractors can do to like better protect themselves in this situation? Yeah. So  I mean, it really starts at the very beginning before you enter into the contract. you should ensure that  when the contract's being agreed, the provisions relating to retention are clear and understood,  so there's no confusion. So things like  you want to be clear about when  the retention gets paid, make sure it's not conditional upon  other obligations under another contract, which is what you... do see from time to time where the contracts, what you tend to see is where the main contractor tries to link it to their completion under their main contract, so they're making it conditional. However, that was outlawed by the Construction Act was that particular practice. And also just if you're the party paying the retention, just try and keep the percentage as low as possible. you so it's not tied up as much money. If you're the party, obviously receiving the retention, then you'd want it the other way around. And the other thing is just keeping good records. Just, just make sure you diarise when the retention is due or when you think it's due. Make sure you follow that up, you know, request payment. Cause in a lot of times, parties just don't even request the retention. You know, it kind of just gets left. Really?  Yeah. And people forget about it. know,  yeah.  I mean, it's one of  the problems with retention really is that, know, you sometimes do see when parties are tendering for projects that they sort of uplift their price to take account of the fact that they may not recover the retention in due course. Right. uh So  I can imagine there's probably millions of pounds sat  out there in just all recovered. Yeah, yeah. That's good. And do you have, have you had much success in actually with the clients you've been involved with? you were covering any of retentions? Yeah, we, we, the common disputes, so they do happen all the time. What you tend to find is retention disputes tend to be part of a bigger dispute. So, you know, might be a dispute over the final account, say, you know, the final payment under a... under a construction contract  and retention is obviously part of that. eh A lot of those types of disputes involve allegations of defects, know, they're saying  the work's defective so you can't have your retention. But a lot of the time it's just parties holding onto the money. They just don't want to pay, or they haven't got the money to pay it. Obviously insolvency causes problems. But you can adjudicate. So if you're a party to a construction contract in the UK, you do have a statutory right to adjudicate. you could refer. So say you were a subcontractor and you didn't get paid your retention. You could refer that dispute to a third party adjudicator. And the adjudicator would look at that and decide whether or not you were entitled to it. And that's quite a quick process. You can have a decision within four weeks  of  referring it to adjudication. So it's quite uh a  quick and efficient process of getting paid retention. That's  generally where  we tend to get involved. So if there is a  formal dispute, then we would take it to adjudication to get paid basically. So you go and present the case to the adjudicators for the client? Yeah,  exactly. And the adjudicators tend to be industry  people. there may be a, you know, the adjudicator might be  a building surveyor. might be an engineer or an architect or a QS, for example.  So they know what the industry is like. they know, you know, how it operates and they would  decide that dispute. So it's quite an effective way of em resolving disputes in the UK. It's pretty much the most common. form of dispute resolution. So you're having to go off to court. Oh, absolutely. It's much quicker. Yeah, guess it's really key to have all the actual, before kicking off the actual contract, all the specifications and what's black and white kind of thing in writing beforehand for this process. Yeah, exactly. It all comes back to the contract at the end of the day. The contract will say, Well, it should say how much is your retention when it gets paid, you know, what you have to do to be able to get your retention. So yeah, the contracts is key, you know, in that respect. Yeah. I mean, your kind of expertise in this field, is there a kind of like any type of like industry reforms or anything that you think would be a good idea? Yeah, there's been quite a number of attempts actually to reform the construction industry in terms of retention. specifically. There's even been attempts to abolish it altogether. There's been a number of private members bills laid before Parliament where it's been debated. There was  one particular bill back in,  I it was 2018, where  they tried to abolish it altogether. And then there's been  another one since  where they tried to introduce what they called a retention deposit scheme, which is a bit similar to what they have in the rental market, know, landlord and tenancy where you have a deposit scheme with  your landlord, you know, when you rent it, property. There has been quite  a number of attempts to resolve it, but so far nothing has  actually come of that.  It probably does need to be reformed. There's probably a couple of things where I think it could be improved because, and that is really how the retention gets held because that's the biggest problem  with the insolvency side of it.  as you know, there's quite a high number of insolvencies in the construction industry as you know, when compared to other areas in the UK. So I do think they could do to have something like a retention deposit scheme where the money gets placed into a...  a separate account or some kind of trust account where it's held separately in ring fenced. So if there is an insolvency then  the money doesn't get lost.  I think that's probably probably the way that it could be improved.  They do do that in Australia. So in Australia where you've got a project, a high value project, think,  you know, so when you're talking $20 million  plus that the money that has to be held in a a trust account. I've also seen it within  New Zealand. In New Zealand, the money has to be held in a trust account. It seems to make sense, doesn't it? Yeah. It's the same in  Canada as well. They basically legislated so that the retention is held in a separate account as well. So, you know, there's a general theme that you can see from  how it's operated in other parts of the world that The common theme is the money gets separated out  and put somewhere safe. you know how the UK compares to these countries that have different schemes  or different systems with regards to the percentages of retentions that are lost? uh you you might know if there's an improvement or?  No, I don't know actual specifics of percentages.  No, I'm not sure how they do that. uh I would imagine it's probably similar. Right. Bear in mind,  you know, lot of these are commonwealth, former commonwealth countries, you know. I know in China, they  do  operate  instead of having cash retentions, they have bank guarantees.  So you basically get a guarantee from the bank, you know, as security in America, they tend to use,  I think it's like a bond, you know, a performance bond. uh That would be something you'd, you'd obtain from a financial institution. So there's different methods,  different countries, but the general theme is that, you know, the money is ring-fenced and placed in a separate account. I mean, in terms of the UK government's  current position,  you know, there's no plans at the moment for any changes. So it looks like for the time being, retentions are here to stay. Yeah, well, we'll keep you guys busy at least, I guess.  Yeah, definitely.  Just to wrap up,  what's the biggest amount of money you're missing that you're aware of on any of those projects?  Ones that I've dealt with personally  has been millions of pounds. Really? Yeah. Yeah. It could, in theory, be, I guess it could be more than that, yeah, in the  millions. I mean, it varies. I had a dispute, you know, couple of years ago, which was sort of in the region of tens of thousands, know, sort of 50 between 50 and 100. But it can, you know, regularly it can be hundreds of thousands of pounds. But yeah, the biggest one was, was in the millions. Right. I wonder how much is being lost nationwide each year through the system. There was, I had some figures actually, recent government survey. estimated that the total amount of retention held in the construction sector just in England alone  over the course of a given year was between 3.2 and 5.9 billion.  Oh wow, right. So uh that's just in retention's held. So if you figure  that on  an annual basis, it's a significant. chunk of money. It's a amount of money isn't it? Absolutely, even if it was just 10 % of those when Orion went missing. That's eye-watering isn't it? Yeah, it's a controversial subject and opinions divided  like I say depending on where you sit in the supply chain  but it doesn't look like there's any plans to change it at the moment.  Okay. Gary, thank you so much for joining us today.  It's been very insightful. um If anyone wants to find or connect with you or find out more information about Retentions or  HK Legal,  where's the best place for us to point them to? You could go to  website. you could, if you just simply Google Hawks while Kilvington  or alternatively, you'll be able to  find me on LinkedIn  or Alternatively, just email me at gashton  at hklegal.co.uk.  Okay, perfect. We'll drop the links to the website,  your LinkedIn page  below the video. Thanks once again. Much appreciated, Gary. Thank you. Cheers!