Aftershocks following Carillion's insolvency continue to affect the construction industry with many businesses suffering financial difficulties in the aftermath. The collapse has laid bare the industry's problematic practices of late payment and the widespread use of retentions.
The retentions in this context are monies withheld by main-contractors under sub-contracts with their sub-contractors, the purpose of which is to secure performance by sub-contractors of all of their contractual obligations including those falling due after they have left site. The sub-contracts do provide for payment of such retentions to sub-contractors at stated stages. Nevertheless, there is a widespread problem, in practice, of main-contractors not paying those retention monies in accordance with the sub-contracts, on time, without a struggle or at all.
Unfortunately, retentions are widely misused by main-contractors often as a means to boost cash resources. Sub-contractors and suppliers further down the chain are therefore deprived of this cash, which can have serious effects on their own cash flow and, in some cases, tip them into insolvency.
Recognising this problem, the Department for Business, Energy & Industrial Strategy carried out a consultation at the end of last year on "Retention payments in the construction industry" (which ran alongside another, related, consultation into the 2011 changes to the payment provisions of the Housing Grants, Construction and Regeneration Act 1996).
You can read more about these consultations in our November 2017 article, here: Construction industry consultations underway (on adjudication, payment and retentions).
MP proposes new legislation to protect retentions
On 9 January 2018, Peter Aldous MP launched the Construction (Retention Deposit Schemes) Bill 2017-19 as a Ten Minute Rule bill.
At the bill's first reading in the House of Commons, Mr Aldous explained that the bill is designed to protect the supply chain from retentions lost as a result of upstream insolvency. He emphasised that action is needed soon to prevent further construction industry insolvencies and highlighted the issues and solution as follows:
- "Retentions are deductions – usually 5%, but sometimes 10% – from moneys due to a construction business. Ostensibly, they are held as security in case a firm fails to return to rectify defects. However, in practice, they are often withheld to bolster the working capital of the group withholding them. Under standard industry contracts, they should be returned within 12 months of the handover of the works in question, but there are regular delays of upwards of three years and, in one case, 12 years. According to Government figures, almost £8 billion of cash retentions has remained unpaid over the last three years. Most of that cash has been provided by SMEs. No other industry puts so much cash at risk and places such a burden on small businesses."
- The solution is to enact legislation to enable retention money to be secured and ring-fenced in a retention deposit scheme (subject to the other party having a right of recourse to that money) so that it would be available to be released on time, rather than subject to the current wait of two or more years. If money was secured in this way, banks would be able to lend to firms on the back of such security.
- The UK is out of step with other countries where legislation is in place to ring-fence cash retentions and/or to provide security for construction payments in general. Mr Aldous gave examples, including the position in Canada and the United States, where a system of charges can be placed on a building or structure by a firm that has not received its payment.
- Interest accumulating on the retentions could be used to fund the costs of the scheme.
The Construction (Retention Deposit Schemes) Bill 2017-19
The Construction (Retention Deposit Schemes) Bill 2017-19 (the Aldous Bill) was introduced into Parliament on 23 April 2018. It provides:
- for the establishment of retention deposit schemes to safeguard cash retentions;
- that contractual retention provisions will be invalid if the payer does not pay retention moneys into a retention deposit scheme and give notice to the payee of the details of the scheme before withholding the money; and
- that failure to take this action will mean the retention becomes payable to the payee within seven working days.
As reported in the construction press, there is growing support for the Aldous Bill and for the overhaul of the industry's payment practices generally. Construction News reported that the Building Engineering Services Association, the Electrical Contractors' Association and the SEC Group have compiled a list of 120 MPs who support one or both of two parliamentary motions calling for change (including the Aldous Bill). (Source: Retentions ban win backing from 120 MPs)
In demonstration of that support, Mr Aldous was accompanied by representatives from these construction bodies and many others, including the Federation of Small Businesses and the Institute of Directors, when he delivered a petition to the Prime Minister on 23 April 2018 calling on her to reform payment practices and retentions.
Twenty years of campaigning for action
Recognition of the need for legislation can be traced back a couple of decades:
- As far back as 1994, Sir Michael Latham had recommended the placing of cash retentions into a secure trust fund. While his other payment-related recommendations were implemented in the 1996 Construction Act, the omission of provision for retentions has not been rectified.
- A Trade and Industry Committee inquiry more than 15 years ago also recommended retentions be phased out.
- Then, four years ago, a cross-parliamentary inquiry recommended that money retained by a customer from a supplier be held in a trust account.
- Finally, in April 2017, Mr Alan Brown MP introduced the Construction Industry (Protection of Cash Retentions) Bill, also under the Ten Minute Rule. (This bill's progress was curtailed by the general election.)
The Aldous Bill is therefore the latest in a line of attempts to address the "knock-on domino" effect that the abuse of retentions has down the line in the industry. It is due to be read for the second time in Parliament on 27 April 2018, at which point we will have a better idea of its chances of passing into law.