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Renewed debate on payment abuse is welcomed

Firms that have been affected by the abuse of retention payments in the construction industry have been urged to get in touch with their local MP ahead of renewed political debate on this damaging industry practice.

Fiona Hodgson, chief executive of SNIPEF.

Scottish MP, Alan Brown, called on the UK Government to set a definitive timetable to bring an end to the current system, which has cost the sector’s SMEs hundreds of millions since it was first debated more than four years ago.

In his speech, Mr Brown urged the Construction Minister to act now and not “kick into the long grass” the issue of retentions in the UK construction industry. He referred also to previous debates and commitments by past Ministers before asking Government to “take hold of this situation.”

The SNP representative for Kilmarnock and Louden used a Westminster Hall Debate to update fellow ministers on work already taking place within the industry to set up a more equitable alternative to the current system. This would create a retention deposit scheme that would ring-fence retention monies from the cash held by contractors further up the supply chain.

Peter Aldous MP referred to the seminal for the construction industry report by Sir Michael Latham in the 1990s: “Unfortunately, one of Sir Michael’s recommendations remains outstanding and has never been implemented. That relates to cash retentions being retained in a secure trust fund. Two and a half decades on, we really should now be putting right that glaring omission. It is a scar that has blighted and held back the construction industry for many years and caused personal anguish and distress to the proprietors and staff of many businesses.”

Retentions are monies withheld from sub-contractors to ensure that all work is completed properly. The money is meant to be repaid once work is finished and confirmed compliant with industry standards.

However, SMEs regularly report late release or non-payment of cash retentions, which is a source of frustration across the industry. In addition, these monies are always at risk of not being paid if there is an insolvency further up the supply chain.

The news has been welcomed by SNIPEF which is encouraging its members who have been affected by this to get their local MPs involved.

Fiona Hodgson, chief executive of SNIPEF, said: “Alan Brown’s efforts to secure this Westminster Hall Debate is a positive step forward, as it gives our members and indeed all SMEs in the construction sector an opportunity to push for a resolution to this damaging industry practice.

“After years of discussions and consultations, it’s now time to do something about this problem. Setting out a timetable would certainly focus minds on reaching a resolution sooner rather than later.”

According to consultants Pye Tait – who produced a report on this matter for the Department of Business, Energy & Industrial Strategy (BEIS) – the UK’s construction SMEs lost an estimated £670m in retention monies to the insolvencies of upstream contractors between the first Westminster Hall Debate on this matter in January 2016 and October 2017, when Pye Tait submitted its report.

That figure does not include the massive amounts lost following the January 2018 collapse of Carillion. Industry estimates have put the value of lost retentions from Carillion at between £250m and £500m.
Rudi Klein, chief executive of the Specialist Engineering Contractors’ (SEC) Group, said a resolution to this issue is long overdue.

SEC Group is an umbrella organisation made up of a number of bodies, all of which have been running a long-term campaign for legislation to bring an end to late payments, mandate the use of project bank accounts and protect cash retentions.

“This issue has gone on long enough,” Mr Klein said. “Only in construction are SMEs powerless to protect their money. Construction SMEs will tell you that the current system puts their business at risk while seeing their money being used to support the working capital of those whose balance sheets are in negative territory.

“So, while Government remains undecided, small firms continue to lose their retentions, which could instead be used to grow their business and train more people. This is not sustainable which is why we campaign for the system to change – insolvencies in construction are currently running at their highest since the recession.”

Industry bodies including the SEC Group, the National Federation of Builders, the Federation of Master Builders and the Federation of Environmental Trade Associations – as well as one of the UK’s major Tier 1 contractors – have been working with banking experts, insurers and software developers to put together an IT platform as a digital solution to ring-fencing cash retentions.

SEC Group chairman, Trevor Hursthouse OBE, commented: “The abuse of the retentions system has gone on far too long but I am grateful to the Members of Parliament for raising this very important issue. We know that retention abuse exists, we know it brings financial instability to our companies and we also know that the strain for some is crippling.

“I am encouraged by the Minister’s commitment to reform the system and his assurances that status quo is not an option, but we still do not know when or what the Government intends to do and whether they support protection of our monies with legislation and the power of public procurement. Alternative solutions to the retentions issue may or may not be found but until they are, it’s essential that funds retained are protected from entirely unjustified and unnecessary loss through upstream insolvency.”

Support for this working scheme would help protect the £4.8bn of retentions that are annually outstanding, most of which are due to SMEs that would benefit from a greater financial stability that would strengthen the construction sector as a whole.

4 March 2020

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