, Building
Practical completion was eighteen months ago. £4,200 of your money is still sitting in someone else's bank account, and nobody is being difficult about it. The quantity surveyor is pleasant on the phone. The money is simply not there yet, and has not been since the day the job finished.
That is retention, and it is the most normalised cash problem in British construction. Around it sits a payment system that is governed by statute, misunderstood by most of the people operating in it, and unusually generous to whoever knows the rules.
What the Act actually gives you
The Housing Grants, Construction and Regeneration Act 1996, substantially amended by the Local Democracy, Economic Development and Construction Act 2009, applies to most construction contracts in the UK. The main exclusion to know is contracts with a residential occupier for work on their own home.
Where it applies, it gives you several things whether the contract says so or not.
- A right to stage payments where the work is to last 45 days or more, rather than payment only on completion.
- An adequate mechanism for determining what becomes payable and when, with a due date and a final date for payment.
- A prohibition on pay-when-paid clauses, except where the party further up the chain has become insolvent.
- A right to suspend performance for non-payment, on seven days' written notice, with an entitlement to the reasonable costs and the time lost.
- A right to refer a dispute to adjudication at any time.
If a contract fails to provide for any of these, the Scheme for Construction Contracts fills the gap. You do not need the other side's agreement to have these rights. You need to use them.
The notice regime is the whole game
The payment mechanism turns on notices, and the dates are short.
You make an application or interim valuation. A payment notice, specifying the sum the payer considers due and the basis of calculation, must be given not later than five days after the due date. If the payer wants to pay less than the notified sum, they must serve a pay less notice before the final date for payment, again with the sum and the basis.
The consequence of missing those is the interesting part. If no valid payment notice is given, and in most standard forms your application becomes the default payment notice, the notified sum is the sum in your application. If no pay less notice follows, that sum becomes payable in full, whatever anyone thinks the work was actually worth. Adjudicators enforce this, which is where the phrase smash and grab comes from.
So the practical advice is dull and valuable. Diarise the due date and the final date for every valuation on every contract. Make applications in the form the contract requires, to the person it names, by the method it specifies, on time. An application that is a day late or sent to the wrong individual can lose the protection entirely.
Retention is a loan with no interest
Retention is a percentage withheld from every payment, commonly 3% or 5%, against the risk that you do not come back to fix defects. Typically half is released at practical completion and the other half at the end of the rectification or defects liability period, which is often twelve months but can be longer.
The arithmetic is worth seeing. On £400,000 of turnover at 5% retention, £20,000 of your money is held at any time. Half of it is held for a year after you finished. If your net margin on that turnover is 5%, the retention held is roughly equal to your entire annual profit, sitting in somebody else's account, funding their working capital rather than yours.
It also ranks poorly if the payer fails. Unless retention is held in a separate trust account, which it rarely is without a specific clause, you are an unsecured creditor for it. Retention lost in an upstream insolvency is a recurring cause of failure further down the chain, and the government's consultations on retention practice over recent years have not changed the basic position.
What you can do about it, in descending order of realism: negotiate the percentage down or a cap in cash terms; offer a retention bond instead, which costs a premium and keeps the cash with you; ask for retention to be held in trust; ask for a project bank account on larger public work; and, at minimum, diarise both release dates the day you sign, because retention is very often not released simply because nobody asked.
Use the remedies, calmly
Non-payment has remedies that most small contractors never use because they fear damaging the relationship. Used properly, in order, they mostly do not.
Start with the notice trail, because a clear application and no pay less notice is a strong position. If payment does not arrive by the final date, a letter stating that the notified sum is due, referring to the section of the Act, is often enough. The right to suspend on seven days' notice is genuine and it is a real lever, though suspension needs care because doing it without the right basis is a repudiation risk.
Adjudication is designed to be fast. A decision is normally required within 28 days of referral, extendable by 14 days with the referring party's consent or longer by agreement, and it is binding until finally determined by litigation, arbitration or agreement. It costs money and it is available at any time, including after the job.
For ordinary commercial debt outside the payment regime, the Late Payment of Commercial Debts (Interest) Act 1998 gives statutory interest at 8% above the Bank of England base rate plus a fixed sum of £40, £70 or £100 depending on the size of the debt.
It is also worth knowing who you are dealing with before you start. Large companies must publish their payment performance twice a year under the Reporting on Payment Practices and Performance Regulations 2017, and the returns are searchable on the government's service. Average days to pay, and the proportion paid within 60 days, tells you what your cash flow is going to look like before you price the job.
Where this shows up in the game
Construction arrives in Business Baron with the Property & Construction Track, an add-on to the full game. The game handles work in progress and staged payments, and it keeps profit and cash on separate screens, which is the distinction that closes real contractors. A profitable book of work can still leave you unable to pay wages.