U.K. government announces plans to ban retentions in construction contracts

By Emma Peterson. 

How the end of retention clauses protects cashflow and small businesses. 

Recently, U.K. government officials made a landmark decision to ban retention clauses in construction contracts. This is a change that National Federation of Roofing Contractors (NFRC) has been advocating and campaigning for years. To learn more about what this ban means for roofers and other professionals in the field, RoofersCoffeeShop® spoke with James Talman, CEO of NFRC, for an episode of the Roofing Road Trips® podcast. 

First and foremost, the retention clauses in question are part of contracts that have allowed larger firms "to withhold a portion of money under construction contracts. This practice has tied up contractors' cash for decades.” Why were these clauses created in the first place? James gave a short overview:  

I'm not necessarily the total expert in the origins, but as far as I understand, these clauses go back to the 1840s when the rail infrastructure was really blossoming. And sadly, back in those days, there were a lot of opportunists, and the clients were worried about work not being completed or companies defaulting.  

So, the withholding clause was created. Back then it could be up to 20% to make sure that money was going to be used either to get someone else in to finish the work or to put right things that weren't done properly. And then that sort of transitioned into general construction in the mid-19th century and became sort of standard practice to be written into contracts. 

And while this practice came out of a logical place, in modern history it has become more troublesome than beneficial. James explained, “This clause has become outmoded in the modern years... I came on as group CEO for NFRC a decade ago and when I spoke to contractors, this was the single most important general topic that came up as it was impacting cashflow and creating larger supply chain issues.” 

What issues beyond cashflow were driven by this clause? There have historically been issues with large contractors who have government contracts going into liquidation. Because of the retention clauses, that liquidation causes issues down the supply chain as the retained money disappears for the smaller contractors working under that large contractor. And for a small business, losing that money can cause everything from layoffs to the loss of the entire businesses. James shared some numbers related to this, adding, “There's 38 businesses every day that closes in the UK because of liquidity issues, small businesses. That's the equivalent of 266 small businesses every week. It is these businesses that the banning of these retention clauses should help.” 

Listen to the whole episode to learn more about the U.K.’s payment retention clauses and the recent decision to eliminate them.