Jan 18 2019

Retention Bonds

Retention bonds have always been a contentious subject in the construction sector. The practice of holding retentions on contracts was brought to the forefront by the private sector and Government following the collapse of Carillion in January this year (see report).

The following contractors went out of business in 2018:

  • Carillion plc – January 2018
  • Lagan Construction Group – February 2018
  • Lagan Construction Group Holdings – February 2018
  • Lagan Building Contractors – February 2018
  • Lagan Water Limited – February 2018
  • Cover Structure – March 2018
  • Hydrock Contracting – March 2018
  • QDS Contracting – March 2018
  • Polydeck Group Ltd – May 2018
  • Rippin Limited – August 2018
  • Heritage Building & Conservation – May 2018
  • GPL Group – August 2018
  • Heritage Building & Conservation (North) – May 2018
  • Cull & Griffiths – August 2018
  • Ikon Construction Ltd – May 2018
  • AOC Interiors – August 2018
  • Platinum Projects Europe Ltd – June 2018
  • George Birchall – September 2018
  • Crummock Holdings Ltd – June 2018
  • H. Waterhouse – September 2018
  • Crummock (Scotland) Ltd – June 2018
  • VVB – November 2018
  • Crummock Ltd – June 2018
  • Acheson & Glover – November 2018
  • Annick Structures – June 2018
  • Forrest Group – December 2018
  • HH Drew – July 2018
  • Carbon Dynamic – December 2018
  • DG Cummins & Co – July 2018
  • Bolt and Heeks – December 2018
  • Cuddy Group – July 2018
  • Proline – December 2018
  • Stewart Fraser – August 2018
  • Radford Group – December 2018

As most UK contractors will have experienced, the value of outstanding retentions can build up over time to a substantial sum. Denial of precious working capital to contractors in the UK has had a crippling effect, evidence of which was realised in earnest with the insolvency of five sub-contractors in one week of 2018 as a result of ‘cash flow difficulties due to high retention levels, [and] the tight margins within the sector” (Construction Enquirer, ‘Civils contractor Crummock collapses’, 4th June 2018).

Similar scenarios featured throughout 2018, when reviewing the list above, the range of companies becomes apparent. Two assumptions can be made from this: a) any company can go bust, no matter how long established or sizeable the turnover, b) when main contractors go bust the supply chain suffers and we often see a ‘snow ball’ effect. Clearly there will be a number of contributing factors in such events, however, the frequency in which retentions are mentioned as a cause highlights the magnitude of the problem.

In response to the behemoth that was Carillion falling into administration, promising headway was made by MPs with the Aldous bill at the start of 2018. The bill proposed that all retentions should be held in trust rather than forming part of the beneficiary’s available cash flow. The Bill was initially introduced to Parliament on the 9th January 2018 under the ‘Ten Minute Rule’ allowing MPs to make their case for new bill proposals. The second reading of the bill is expected on the 25th January 2019 where MPs will be able to debate the proposal in the House of Commons.

It is safe to say that the construction industry will be keenly monitoring any movement on this in the coming weeks particularly given the period of prolonged uncertainty that the UK economy has faced, and will continue to face in the year ahead. According to Peter Aldous (2018), the insolvency of Main Contractors holding retentions has resulted in ‘the industry losing around £1,000,000 for each working day, mostly from SMEs’ who can ill afford such losses. A more balanced approach to legislation in this area will help protect SME businesses in the sector and help create stronger working capital buffers for those rainy days. Given the amount of support the bill initially received, and the increasingly tricky position of the government, there is growing expectation for the Bill to succeed given the events of 2018 and the turbulent political and economic outlook for 2019.

If contractors are interested in an immediate solution to the cash flow problems created by retentions, look no further than the surety market. A simple and effective solution is to use a retention bond. This is provided to the employer upon commencement of the contract and protects them to the value of all retentions that would normally be deducted from interim payments on the contract. Put simply, the provision of a retention bond, which represents often as much as 2% to 5% of the contract value, will free up a significant portion of tied up working capital and will contribute to a more favourable cash flow position for many companies.

The Henderson Surety team specialise in all types of bonds and guarantees on behalf of our clients. We have many years of experience with bond wordings and related issues and will be able to negotiate favourable terms for the provision of retention bonds.

We make no charge for an initial review and would welcome the opportunity to meet with you in order to discuss and explore how we would negotiate a suitable facility for your company.

Please feel free to contact the specialist team at Henderson Surety Services:

London Office: 0207 280 0913
Manchester Office: 0161 687 2317
Email: info@hendersonsuretyservices.co.uk