Finding a fairer deal

Earlier this year, a short life working group set up by the Scottish Government recommended the introduction of a retention deposit scheme to combat payment abuse and help contractors receive vital funds. So how exactly would it work?

Under the current tenancy deposit scheme in Scotland, a landlord must deposit a tenant’s deposit in a scheme operated by approved bodies, or obtain insurance out of which a deposit can be repaid.

Like this arrangement, which enables tenants’ deposits to be kept secure, a retention deposit scheme (RDS) would keep retention monies secure from poor and improper management of supply chain funds.

It would be operated as a digital platform, similar to online banking, so contractors can keep track of any retentions held inside it, and could be regulated by the Financial Conduct Authority.

In the example given on this page, the client enters into a contract with the main contractor which requires a 5% retention. The client deducts 5% from progress payments and pays these deductions into the RDS. The client pays an insurance premium equivalent to 0.23% of the progress payment to the RDS whenever a progress payment is made to the main contractor.

Assuming the main contractor sub-contracts 80% of the project value, the RDS will automatically divide the retention pot on a pro-rata basis between all the contractors in the supply chain. This will allocate 20% of the 5% retention pot (1%) to the main contractor and leave the sub-contractors with the remaining 80% of 5% (4%). All contractors will be able to see that their share of the retention pot is secure at any time by accessing the RDS platform.

With just the client paying the whole retention into the RDS, there’s no need for other parties in the supply chain to deposit retentions. If additional retentions are withheld from the supply chain at a higher percentage than that applicable up the supply chain then this additional retention must be paid in too.

For example, if a client is withholding a 5% retention amount and the main contractor withholds a 7% retention amount from sub-contractors, then an extra 2% will be required to be paid into the RDS by the main contractor to be held for the benefit of the supply chain.

Whenever a payment into the RDS is not made in accordance with the contract, all parties are immediately advised and actioned according to the terms and conditions as agreed. All other payments are automated by the scheme or advised by the adjudicator.

If defects exist in the completed work at the point of insolvency, or there remains incomplete work, the RDS provides the client with access to the entire 5% project retention fund. Where sub-contractors have wholly/satisfactorily completed their work packages, full retention release is provided.

The 0.23% insurance ensures that the client’s full retention is protected, and the client also benefits from a stronger and more efficient and less disruptive supply chain.

If alleged defects, or required remedial work, are disputed, the dispute must be referred to adjudication within a defined period, starting from the date on which that party objected to the release of monies. Disputed monies can be placed on hold and the adjudicator will then notify the RDS of their decision as to whom the whole or part of the retentions must be released.

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BENEFITS OF AN RDS

• Cost effective: The 0.23% insurance levy paid by the client includes the costs of operating the scheme.

• Rapid adjudication: Disputes are resolved quicker as they are automatically referred to adjudication within a defined period. Separation of the cash is expected to lead to a fall in spurious claims.

• Monies are safe: Retentions are held in a ring-fenced account, so payments occur automatically without delay unless there is a dispute.

• Improved funding access: Protected retentions will provide collateral to banks and others for lending purposes – the exact opposite of today, where retained retentions are assumed to hold no value.