Retentions: harmful, inefficient, outdated

Contractors campaigning for the abolition of the retentions system have taken heart from the publication of a parliamentary report on the issue.

The withholding of retentions "is an outdated practice that should not be necessary in a modern, productive industry that delivers a high-quality product", according to the House of Commons select committee on trade and industry.

The committee said: "Given the doubtful benefits and the clear disadvantages of retentions, it would obviously be in everyone's interest for such an inefficient - and frequently harmful - practice to disappear."

The select committee report on the use of retentions in construction was published last week. And the Department of Trade & Industry (DTI) is expected to give its response by the beginning of February.

Despite initial disappointment that the select committee report declines to recommend legislation to outlaw retentions, specialist firms have been encouraged by the MPs' broad conclusions.

Rudi Klein, chief executive of the Specialist Engineering Contractors Group, said: "The more I read the report, the better it gets. There is fantastic ammunition here to support our case.

"The focus is now with the DTI. It is up to it to respond. And we will be lobbying the department on particular issues such as the ringfencing of retentions and the release of monies on satisfactory completion of work."

Key findings in the report are:

* The withholding of retentions is a practice that places a heavy burden on many construction firms, particularly the SMEs that make up the majority.

* The perception by clients that the system is needed is a reflection of the mistrust between them and the construction industry.

* Legislation to outlaw retentions is unlikely to have the desired effect.

* All government departments and agencies should provide a lead by adopting new working practices as quickly as possible and taking a uniform approach to phasing out retentions.

* A target of phasing out retentions in all government contracts by 2007 is challenging but "we see no reason why it should not be attempted".

* In the negotiation of future PFI contracts the government should insist that its main contractors agree not to require retentions from their contractors and subcontractors.

* Bonds and warranties "do not appear to provide a long-term solution to the problem".

The report acknowledges that the financial impact of the system is "considerable". And it says: "It is perhaps surprising that the DTI has not made its own assessment of the impact of retentions on the sector."