Contractor insolvency creates crushing retention issue
A study by the Electrical Contractors’ Association (ECA) has found that contractor insolvency is stopping the release of retention payments, potentially crippling electrical contractors.
According to the study, 33% of respondents say they have lost retention payments in the last two years as a result of the main contractor going bust. Of those, 72% report losses of up to £10,000. The survey found that 67% believe retention payments should be placed in a separate trust account that ensures a subcontractor can still access its payment even if a client or main contractor goes bust.
Ken Tracey, ECA Head of Commercial, Contracts and Legal says: “Despite revisions to the Construction Act in 2009, a clause of ‘pay when paid’ can still be applied if a client becomes insolvent. That means main contractors have a ‘get out of jail free’ card and don’t need to pay their subcontractors. The Government needs to take action to prevent main contractors from shoe-horning this clause into their contracts so that smaller firms aren’t crippled by lost retention payments.”
Tracey adds: “Most firms don’t have the luxury of making 2.5 per cent profit. Therefore, losing a retention payment could wipe out any profits from a project and in a worst case scenario, could bankrupt the firm in question. The trust account solution is by far the one favoured in the survey results. These are typically included in the standard form contracts but are nearly always crossed out. It’s not fair that hardworking firms are forced into taking on work that puts them at a severe financial disadvantage.”
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