In October, the Department for Business, Energy & Industrial Strategy (BEIS) launched two consultations, to review payment, adjudication and retention practices in the English construction industry. Responses are required by 19 January 2018.
Review of the Construction Act
Almost 20 years since the Housing Grants, Construction and Regeneration Act 1996 first came into force and five years on from the changes made in 2011*, BEIS is reviewing the impact of those changes on the construction industry.
Review of the effectiveness of the 2011 changes
To help inform the review, BEIS launched an "Open consultation on the 2011 Changes to Part 2 of the Housing Grants, Construction and Regeneration Act 1996" in October. Those changes were introduced to address weaknesses in the 1996 Act and, as set out in the final stage Impact Assessment, were intended to:
- "increase transparency and clarity in the exchange of information relating to payments to enable the better management of cash flow and more effective dispute resolution;
- encourage the parties to resolve disputes by adjudication, where it is appropriate and timely; and
- strengthen the right to suspend performance under the contract."
More specifically, the changes were to:
- "remove the restriction on who could issue a payment notice;
- improve the clarity of payment and withholding notices;
- introduce a 'fall back' provision – allowing a payee to submit a valid payment notice where a payer has failed to issue one;
- prohibit payment by reference to other contracts;
- introduce a statutory framework for the costs of adjudication;
- remove the requirement for contracts to be in writing for the Act to apply; and
- improve the right of suspension."
The BEIS consultation is restricted to English law and practices and seeks to establish how effective the 2011 changes have been in securing those objectives.
In the foreword to the consultation, Lord Prior of Brampton summarises the government's support of best payment practice by, for example: its use of payment mechanisms like project bank accounts; the introduction of the Public Contracts Regulations 2015, which require 30-day payment terms in new public sector contracts; and the imposition of a duty on large organisations to report on payment policies and practices. He notes, however, that, despite these initiatives, there is still "scope for improvement" in construction industry payment practices.
There will, no doubt, be many in the industry who argue that "scope for improvement" understates the true position – including many no longer in business as a result of unpaid invoices and repeatedly late payments. The government is, nevertheless, meeting its promise to review the 2011 changes after five years and the potential the consultation offers for effecting improvements is to be welcomed.
The consultation comprises 51 questions, divided into three sections, which look at the measures intended to: address costs; improve the clarity and transparency of the payment framework; and improve the right of suspension.
You can access the consultation here: you have until 19 January 2018 to respond and the outcome is expected to be published within 12 weeks.
Do not be put off by the extent of the questions raised in the consultation – even if you cannot answer all the questions. While some of the questions are clearly intended to be answered by legal representatives, rather than parties who conduct their own adjudications, all responses will be considered by BEIS and will help to fine-tune the adjudication process and payment system. It will also be useful to find out to what extent the cost of the adjudication process might be disincentivising its use.
- Part 8 of the Local Democracy, Economic Development and Construction Act 2009 amended Part 2 of the Housing Grants, Construction and Regeneration Act 1996;
- the Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011 amended the Scheme for Construction Contracts (England and Wales) Regulations 1998; and
- the impact of these changes, which came into effect in October 2011, was assessed in Impact Assessment Number BIS0146/BIS0093.
And … a consultation on retentions in the construction industry
Running alongside the Construction Act review, BEIS has also launched a consultation to review the industry's use of cash retentions.
Payment issues lie at the heart of many construction disputes and this additional consultation is part of the government's continuing attempts to address the late or non-payment culture in the industry (as referenced above).
As part of this latest consultation exercise, BEIS has provided links to three documents:
- Retention payments in the construction industry: a consultation on the practice of cash retention under construction contracts;
- Consultation Stage Impact Assessment; and
- Retentions in the Construction Industry – a research paper prepared by Pye Tait Consulting on behalf of BEIS.
What are the issues?
The consultation raises a number of issues, such as:
- contractor insolvencies which result in businesses losing retentions;
- the need to raise awareness of the Construction Act prohibition against payment of retentions being made conditional on performance of obligations under another contract;
- the late payment, non-payment and/or potentially unjustifiable withholding of retentions and the knock-on effect along the supply chain; and
- the need for further investigation into alternative mechanisms (and how they would operate in practice) and the retention practices of other countries such as New Zealand and Australia where moves are afoot to hold retention money in trust accounts or on a retention deposit scheme as in New South Wales, Australia.
BEIS research – Retentions in the Construction Industry
As part of the consultation, BEIS has published an extensive research paper (number 17) on Retentions in the Construction Industry. The paper, explains retentions, their use and the extent of their use in the construction industry – and their misuse – and what alternatives to retentions exist as well as costs/benefits analyses.
The report highlights the impact that the withholding of retentions has on parties in the contract chain:
- for contractors, they can lead to higher business overheads and weakened relationships throughout the construction supply chain as well as constraints on business growth; and
- for clients, they can increase the costs of construction projects.
Suggestions for how to deal with these issues include:
- imposing a time limit on payment;
- project bank accounts;
- escrow stakeholder accounts;
- retention and performance bonds; and
- retention deposit schemes.
The retention consultation comprises six sections: A) Existing measures; B) Supporting documentation; C) Late and non-payment of retentions; D) Retention "Caps"; E) Existing alternative mechanisms to retentions; and F) "Retention deposit schemes". It closes at 11:45pm on 19 January 2018. Click here to access it.