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Retentions Bill breakdown: what will amendment mean for industry?

Second reading of bill is now scheduled for April 27 with aim to introduce approved deposit schemes that will be a legal requirement for any construction industry retentions to be permissible

MP Peter Aldous has presented the first reading of the Construction (Retention Deposit Schemes) Bill in parliament today that seeks to amend existing regulation to put a statutory obligation on any group withholding cash retentions to use an approved deposit scheme.

The motion has now been approved for a second reading in parliament in just over three months’ time.

BESA, which helped devise the new bill alongside the ECA and Mr Aldous, expects the proposed legislation to be introduced as an amendment to the 1996 Construction Act. All contracts within the act will be required to make use of retention deposit schemes with the exception of agreements with householders that are not included in its scope.

The organisation added that failure to deposit monies in such a scheme would invalidate any contractual clause allowing for cash retentions to be withheld.

Government, under the bill, will be required to provide regulation for how retention deposit schemes function, while disputes over releasing monies would be decided via statutory adjudication that is already used in other construction contracts.

BESA pointed to three government approved not-for-profit schemes used for the protection of deposits from shorthold tenants - outlined under the Housing Act - as a potential model for retention deposits.

“The operators of the scheme would hold the monies in trust so that they cannot be accessed by insolvency practitioners,” said the organisation in a briefing for the Retentions Bill.

The bill, as currently written, would require organisations wishing to establish deposit schemes to obtain approval from the Department for Business, Energy and Industrial Strategy (BEIS). Approval is expected to be based on criteria such as deposit taking experience, financial standing and the integrity of personnel involved.

Speaking during the first reading of the bill today in parliament, MP Peter Aldous said the bill was being put forward at a critical time for industry and would ensure that retained funds would be secured and released in a timely manner as opposed to a wait of roughly two years.

He said, “This will help increase velocity of cash in the system and if monies are secured in this way, banks will be able to lend to firms on the back of such security.”

Mr Aldous said that a failure to introduce the legislation risked the UK falling behind a number of other countries that had introduced regulation around cash retentions or more secure cashflow in construction.

He pointed to the example of existing tenancy deposit schemes that are self-funded through interest earned on the funds as a preferred mechanism to finance such a scheme for retentions.

Mr Aldous added, “Any profit made is transferred to a charity that provides training in the sector. Such as scheme would be a win-win for construction as it would be a source of much needed funds for training.”

The Specialist Engineering Contractors’ (SEC) Group said that an ongoing consultation being held by government on retention in the construction industry has raised two possible objections about use of an approved deposit scheme.

These included clarity over the possible cost of a possible deposit scheme, as well as whether a threshold should be set under which the retention regulations would not apply.

SEC Group chief executive Professor Rudi Klein argued that the retentions scheme, as set out by Mr Aldous, would need to be of no or minimal cost to stakeholders.  However, he said that this would be entirely possible based on the proposed model of using interest earned on deposits as funding for the scheme.

Professor Klein said that while locations such as New South Wales did set out a threshold on cash retentions, he did not believe such a scheme should be considered under the UK bill.

He argued that threshold and funding costs were the only two possible objections raised by the government over the possibility of introducing approved deposit schemes for retentions in its consultation document. However, he said both possible objections were quite straight forward to overcome in the proposed bill and should not derail efforts to introduce deposit schemes.

Professor Klein added, “This is the only option, as far as that document is concerned, that seems to be realistic.”

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