Following confirmation that central government departments will expect their contractors down to Tier 3 to be paid within 30 days, campaigners for fair payment in construction are turning to their next target – the abolition of retentions.
In November, minister for business and enterprise Mark Prisk confirmed at a National Specialist Contractors Council even that government departments would be implementing a 30 day schedule on cascading payments down the supply chain.
The announcement was later confirmed in an Information Note from the Office of Government Commerce to all departments, making timely payment an obligatory inclusion in construction contracts as of December 2010.
The move is a victory for the NSCC which had been actively campaigning for fair play in construction payments since 2007. Suzannah Nichol, chief executive, told CM: “This has been a concerted effort for many years working on contractual documentation and regulation, including the Construction Act. It hasn’t happened overnight.”
According to the OGC, once a Tier 1 contractor submits an application for payment, its government client has seven days to assess it, culminating in the “common assessment date”.
Within 14 days of this date, the money must be in the Tier 1 contractors account. But assuming Tier 2 contractors have already made their application for payment, they must also be paid within 19 days of the common assessment date. In addition, Tier 3 contractors gain the right to be paid within 23 days of the common assessment date.
The OGC note also reminds departments that they should consider moving to Project Bank Accounts (PBAs) unless there are compelling reasons not to do so.
Following the minister’s call for feedback on how the change will work in practice, the NSCC is inviting comments from the industry at www.fairpaymentcampaign.co.uk.
But the NSCC is now stepping up its campaign to bring about the end of retention funds. It says the practice, where clients or main contractors retain a percentage of the contract sum as surety against defects is “an outdated practice which is unnecessary in the modern construction industry.”
Suzannah Nichol said: “Our members are financing the industry through retention funds. The funds massively increase their costs. If their profit margin is 2% and if the retention withheld from them is 5% … well, you do the maths.”
On February 16th the NSCC will hold an event where Crossrail procurement head, Martin Rowark, will explain why it will not hold retentions and is forbidding its main contractors from doing so.
Rowark is quoted as saying “There is little evidence to show that retention results in better quality work, and the practice has a significant impact on the contractor’s cashflow.”
The NSCC is promoting alternatives to cash retentions, such as retention bonds, held between the two contracting parties and a third party insurer.
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I believe that retention funds are very outdated and an unreasonable way of beating the Contractor. It is not just the fact that the money is withheld in the first place, but on a lengthy contract and with say a 6 month defects period the retentions can be held for long periods of time. Thats on top of trying to request the release of retention once the defects period has expired. Clients tend to hold onto retentions well after the expiration of defects period. They also use this as a lever to get additonal work/defects work done well after the defects period has expired. However, they hold the handbag, and you have to do what is necessary to secure outstanding funds.