BIS retentions review on protecting subcontractor funds triggered by Lords
The Department for Business, Innovation and Skills has commissioned a full review of the industry practice of holding retentions, possibly leading to new measures limiting their use and offering additional protection in the event of an insolvency.
The review of one of the the industry’s longest-standing dilemmas was commissioned towards the end of last year from consultancy Pye Tait, which is due to produce a draft report with recommendations for BIS ministers next month.
The firm has already held round-table discussion groups and met a number of businesses in the sector, and is this week launching an online survey to gather opinions from a broader range of businesses across the industry.
The review came about following a debate in the House of Lords on the Enterprise Bill. Lord Aberdare – following lobbying from the the Specialist Engineering Contractors Group – initially proposed an amendment to the Bill calling for retentions to be held in trust accounts.
“I am not suggesting that retention should be abolished overnight or removed altogether. I am suggesting that the government could deliver a really good stimulus to the productivity and output of small firms by starting the process of lifting this unfair burden from them now.”
However, after discussions with Baroness Neville-Rolfe, representing BIS in the House of Lords, Lord Aberdare instead moved a different amendment, calling for a full review of the practice.
Describing the problem, Lord Aberdare said: “On average [retentions] amount to about 5% of payments due and about half of this is retained well beyond practical completion of a project, on average for a further 12 months but sometimes for very much longer.
“Some £3bn of cash is estimated to be held back in the form of retentions at any time. This year alone, small businesses have already lost £30m as a result of their debtor companies going into liquidation before paying the sums that they owe but have retained.”
He highlighted previous select committee reports on payment in 2003 and 2008, and the commitment to drop retentions by 2025 under the industry’s forthcoming Supply Chain Payment Charter.
Lord Aberdare added: “The Bill presents a perfect opportunity finally to address this festering issue. I am not suggesting that retention should be abolished overnight or removed altogether. I am suggesting that the government could deliver a really good stimulus to the productivity and output of small firms in the construction sector by starting the process of lifting this unfair burden from them now, with a view to having a better system in place by the end of this Parliament rather than having to wait for 2025 or even longer.”
Pye Tait has been commissioned to produce a report with recommendations and an “evidence base” for ministers to base their decisions on, with the research covering “an evaluation of the current practice of retentions, its costs, benefits and impacts for the sector, and the costs and benefits of alternative practices”.
Rudi Klein, chief executive of the SEC Group, told Construction Manager that new measures enforcing third-party accounts would bring the UK into line with industries in other countries.
“We want to see legislation that means retention money is placed in a separate account, in the same way as happens with tenancy deposits,” he said.
“In Germany, for instance, they are put in an independent stakeholder account and protected.
“In New Zealand, they have just brought in legislation that requires the money to be put into trust. We will persist in seeking legislation that requires retention monies are protected.”
Sarah McMonagle, head of external affairs at the Federation of Master Builders, said that the FMB had been campaigning alongside the SEC Group on the issue, and was pleased that the review was going ahead.
“We’ve never had a government review of retentions, so we’re happy it’s being taken relatively seriously. They certainly don’t have retentions in every country and every industry, and they can be a huge financial drain if the employer company goes bust.
“The Payment Charter has an ambition to get to the point [where signatories] are operating without retentions, but it’s just a statement of intent, so it would be good to have something else with legislative backing. But let’s wait and see what comes out of it.”
It’s understood that the findings of the review could be taken forward by the Construction Leadership Council, where council member Madani Sow – until recently chief executive of Bouygues UK – is leading on the “business models” workstream.
CLC member Simon Rawlinson, also head of strategic research and insight at Arcadis, told Construction Manager: “The Payment Charter is being taken forward. It sits with the Business Model workstream, as a priority activity, alongside the findings of the retention review, under Madani Sow.
“The findings of the BIS study will include short-term recommendations on retention and could lead to a change in current retention practice.”
Responding to Construction Manager’s suggestion that government could “outlaw” retentions, he said: “Outlaw is a strong term, requiring complex steps. But it could be that a wider range of people choose not to use retentions. An organisation could take the view that they will get more benefit from not holding retentions, than by holding retentions.
“So in addition to the Payment Charter, there is work being done on looking at retention as a potential means of getting money into the system.”