Scottish ministers are considering legislation to regulate the practice of cash retention in public and private sector construction contracts in Scotland. 

A consultation has opened in order to seek information and gather views on current practice, and on the findings of a research report published with the consultation, as well as on the potential impacts of introducing legislation in this area.

There is evidence that some payment practices prevalent in the construction industry are a barrier to investment, productivity improvements and growth. Cash retention, where the process is misused or abused, can be one such practice.

A longstanding practice in the construction industry, the retention system is intended to mitigate the risk of a failure to complete a construction project or a failure to rectify defects by withholding part of the contract sum. In most cases a retention is imposed by the client employing the main or tier 1 contractor and this is mirrored in all subsidiary contracts throughout the supply chain.

Following concerns expressed by parts of the industry, the Scottish Government agreed to undertake a review of retention payments. It commissioned independent research from Pye Tait, whose report is published with the consultation. 

Among the key issues it identified are that a significant proportion of companies say they deliberately avoid business in which retentions are involved; that the current system operates to the advantage of clients and tier 1 contractors but to the disadvantage of medium and smaller companies, particularly where a contractor insolvency might occur; that late and non-payment of retention monies is a significant issue for some contractors; and that there is a need to investigate a fairer, more neutral and more protected approach to assurance in construction contracts.

The consultation seeks views on these matters as well as on the effectiveness of existing alternative mechanisms to retentions, and the benefit of holding retentions in a retention deposit scheme or trust account.

Click here to access the consultation. The deadline for responses is 25 March 2020.