Under the Construction Contracts Act head contractors must hold all retentions on trust. This can impose a heavy administrative and financial burden on companies, and creates substantial personal liability for directors.
Insurance-backed bonds can be a convenient, low risk and cost effective alternative for many construction firms.
RETENTIONS MUST BE HELD “ON TRUST”
Since 31st March 2017 the Construction Contracts Act has required main contractors to hold retentions “on trust”. This means they have to account for it separately and theoretically can’t use it to fund their own cashflow. And if the business fails retentions should be repaid to subcontractors as a priority over other creditors.
However, retention money does not need to be held in a separate account and it can be mixed in with other money. This leaves it vulnerable to appropriation by a liquidator, with no guarantee that it will be returned to subcontractors ahead of any other creditors. Ultimately, there is still no guarantee that retention funds will physically be available, because if there is no money left in the business any money owed simply cannot be repaid.
In addition, if a main contractor is holding retention money on trust, its directors may be exposed to personal liability for breach of their trustee duties under the Trustee Act 1956.
HEAD CONTRACTOR RETENTION BOND
This form of bond provides main contractors with a cost effective, simple alternative to holding retentions on trust, as they are otherwise obliged to do under the Construction Contracts Act. A bond is taken out for each project and covers the total amount of retentions held on that project. It means that in the event of a default by the main contractor subcontractors can make a claim directly to the insurer for the retentions owed to them.
BENEFITS OF A HEAD CONTRACTOR RETENTION BOND
- Comply with your obligations under the Construction Contracts Act but without needing to hold retentions on trust
- Maintain cashflow flexibility as retention money does not need to be reserved as cash or other liquid assets
- Directors not exposed to personal liability for breach of their trustee obligations
Applicants for a head contractor retention bond must first be pre-approved by the insurer. This is done by completing an application form requiring information such as: the maximum value of retentions typically held, the company structure, a list previous contracts, a work in progress report and by providing recent financial accounts. This pre-approval will generally be updated each year, or when the head contractor wishes to increase their total retentions limit, by providing up to date financial accounts.
Once approved, the contractor then applies for a bond per project to cover the sum of all subcontractor retentions withheld on that project. This includes information on the specific contract, the expiry date of the bond and a list of the subcontractors, their details and individual retention amounts. The premium is calculated based on the total amount of the bond.