Andrew Macleod considers two recently launched Government consultations on the effectiveness of changes to the Construction Act and the use of Retentions in the Construction Industry.
On 24 October 2017 the Government launched two consultations, one to review how effective the 2011 changes to the "Construction Act" have been; the second on the use of retentions in the construction industry.
In so doing, the Government stated its belief that there is scope to improve payment practices in the construction sector and it wanted to assess the extent to which progress had been made towards the adoption of best practice for prompt and fair payment. It also stated that concerns have been expressed by parts of the industry about unjustified late and non-payment of retention payments and the impact on small businesses.
In both areas, the Government will assess the extent of the issues which will help to decide whether and what further intervention is necessary.
The 2011 Changes
Payment and dispute resolution (adjudication) legislation for the construction sector was introduced by Part 2 of the Housing Grants, Construction and Regeneration Act 1996 ("the Construction Act") with the aim of tackling prompt and fair payment issues within the sector.
Following industry consultation, the Construction Act was amended in 2011. The changes were intended to increase transparency in the exchange of information relating to payments, encourage parties to resolve disputes by adjudication, where appropriate and strengthen the right to suspend performance. The effectiveness of those changes in 2011 is under review. The areas for review are:
- whether preventing parties from making a contractual agreement on adjudication costs (other than the adjudicator's fees) has reduced the costs of adjudication (the presumption that each party bears its own costs would remove any incentive to escalate them beyond that reasonably required to decide the dispute);
- whether the effect of removing the requirement for contracts to be in writing has reduced the number of jurisdictional challenges and hence, reduced costs;
- whether removing duplication and uncertainties surrounding payment notices and withholding notices has improved clarity and transparency in the payment framework regarding the timing and amount of money in dispute and reduced the costs of adjudication;
- whether a payee's right to suspend performance is being exercised more frequently and whether the threat of suspension is leading to fewer disputes.
The consultation also considers the overall effectiveness of the Construction Act, looking in particular at:
- the complexity of the existing payment framework;
- whether the payment framework succeeds in establishing clear entitlement to payment or basis of dispute;
- the average length of time it takes to be paid compared with contractual payment terms;
- how often the payment framework results in an adjustment to the amount originally sought;
- the frequency of use of adjudication, enforcement proceedings and other proceedings for final determination.
Finally, the consultation considers whether the 2011 changes have reduced some of the costs of adjudication to make it a more affordable and effective remedy in the cases of non, partial or late payment by looking at:
- the nature and value of disputes referred to adjudication;
- the direct costs of preparing the case and conducting the dispute through adjudication;
- the extent of ongoing "abuse" of the process, for example, "ambush" tactics.
The consultation paper highlights the benefits of the long established retention system – helping to ensure contractors achieve practical completion on a timely basis and acting as an incentive for a defect-free project at the end of the defects liability period.
However, it also raises the disadvantages including the administrative time involved in managing and recovering retention payments, the drain on working capital and inflated bad debt compounded by issues such as overdraft fees and limited access to finance as a result – particularly impacting upon small firms in the supply chain.
Independent research commissioned by the Department for Business, Enterprise and Industrial Strategy identified a number of key issues:
- the scale of retention monies being lost to contractor insolvency;
- a practice of making payment of the retention conditional upon the performance of obligations under another contract, contrary to the 2011 changes;
- the significant impact of unjustified late and non-payment of retention monies on some contractors;
- the need to investigate alternatives, in particular, a retention deposit scheme and holding retentions in a trust account.
The consultation considers these issues and also considers the pros and cons of introducing a "cap" on the proportion of contract value that can be held as a retention, and the length of time it can be held.
Responses to the consultations are due by 19 January 2018.
For more information please contact Andrew Macleod Partner on +44 161 604 1573 or email firstname.lastname@example.org.