Asked by
To ask His Majesty’s Government what progress they are making in
determining how to end the practice of cash retentions in the
construction sector, and whether they plan to meet the 2025
target date for achieving zero retentions proposed by the Build
UK Roadmap and endorsed by the Construction Leadership Council in
2019.
The Parliamentary Under-Secretary of State, Department for
Business and Trade and Scotland Office () (Con)
I thank the noble Lord for his Question. The Government will add
a requirement for reporting on retention payments to the
Reporting on Payment Practices and Performance Regulations 2017.
Work also continues with the Construction Leadership Council to
reduce defects in construction and end the abuse of retentions.
This includes supporting a pilot project with the Get It Right
Initiative to reduce defects, as well as collaboration with the
bodies responsible for construction contractual documentation, to
discourage the withholding of retentions.
(CB)
My Lords, the announcement made last month, which was mentioned
by the Minister, is a small step forward but it is too little,
too late, and it does not go nearly far enough to end the bane of
retentions, which cause huge damage to numerous small
construction firms, and indeed to the sector as a whole. What
further steps are the Government considering? Let me suggest two
possibilities. First, they could ensure that the undesirability
of retentions is included in the Construction Playbook, which
sets out key policies and guidance on how public works projects
and programmes are assessed, procured and delivered, but, rather
shockingly, makes no mention of retentions. Or, secondly, they
could put an effective system of enforcement in place for the
measures he has just described when they are eventually
implemented. If the Minister does not like those two ideas, I
have at least half a dozen more that I could suggest to him.
(Con)
I thank the noble Lord for that contribution. The Government
understand well that the practice of cash retention can create
problems in the supply chain, due to late and non-payment. We are
committed to improving payment practices, but we have to work
with the construction industry in this. The prompt payment and
cash flow review report was just published on 22 November, and a
key measure includes extending and amending the Reporting on
Payment Practices and Performance Regulations, basically to
increase transparency in this vital area to allow large
businesses to provide data to the smaller companies to see how
retention payments are working. We have to work with the
construction sector in this.
The Construction Leadership Council has identified some solutions
to mitigate cash retention payments. Our long-term aim is to
remove the need for retentions altogether and, as I said, we are
supporting the Get It Right Initiative and Cranfield University
to reduce the rate of defects within the buildings commissioned
across the public and private sector. The aim is to establish a
quality metric as a viable alternative to the withholding of cash
retentions as a form of insurance against defects. There is a lot
going on. We are working with the industry and a lot of
consideration has been given to this matter, but, ultimately, the
construction industry itself needs to come to a consensus on how
to improve this area.
(LD)
My Lords, the Minister has just said that the industry needs to
come to a consensus. What he is asking for is the greedy lions to
sit down with the defenceless lambs and decide what menu is going
to be eaten. The reality is that the upper-tier contractors have
not just the whip hand but the bank balance. He will know that
many of them have a business model that functions only because
they retain retentions to which they are not legally entitled.
Will he now introduce a simple measure to put the retention money
that is levied into an escrow account so that it cannot be used
and cannot incentivise upper-tier contractors to use it to fund
their business model?
(Con)
I thank the noble Lord for that question. Indeed, this has been
the practice in the building industry for 150 years; it is the
standard mechanism to ensure that work is done on time and to the
right standard. There is about £4 billion held in cash retentions
against a total turnover in the construction industry of about
£430 million, so, guess what, that works out at 1%, which is
roughly the margin in construction. Various plans have been put
forward: there was a plan for insurance, but that did not work
because of the Carillion failure and Grenfell Tower, and there
have been various plans such as a retention deposit scheme in
escrow. We have consulted the building industry, and there is a
level of support for banning retentions and a level of support
for not changing the system. The construction industry needs to
come together and work out how to do this better.
(Con)
My Lords, does my noble friend the Minister accept that this is
not a time to assume that the status quo is good enough? The
noble Lord, , is absolutely right: what we
see is the big players squeezing the supply chain, and the result
is often that the smaller players benefit not one penny and the
big players do profit. I pay tribute to the noble Lord, , who, when I was in the hot
seat, was pushing on cash retentions. We need to do something
about this. It is very similar to when we rent a home: the
landlord does not get his hands on the deposit; it is held,
essentially, at a distance from the landlord who is renting the
home. We need to change the system. Does my noble friend also
agree that we need to improve the quality of construction? After
all, that is something that needs to get better, and then we
would not have to worry about retentions.
(Con)
I thank my noble friend for that contribution. The Reporting on
Payment Practices and Performance Regulations 2017 require the
larger UK companies to report on a half-yearly basis on payment
practices, policy and performance. The onus is increasing on them
around transparency. The sector welcomes increasing reporting
regulations. Build UK, the leading construction trade body, has
been benchmarking construction companies on their payments since
2018, and improvements have been considerable. In 2018, the
average time for paying invoices was 45 days, and it is now 32
days; the figure for invoices paid within agreed terms is now
82%, versus 61%, and for invoices paid within 60 days it is now
95% versus 82%. That shows that the construction industry can
work positively in this area.
(Lab)
My Lords, similar to cash retention, late payments are a
perennial problem, especially for SMEs and microbusinesses. Over
the last 10 years, the Conservative party in government has
launched no fewer than seven reviews into late payments. What
recommendations have come from those reviews, and what benefits
have SMEs seen from those seven reviews?
(Con)
I thank the noble Lord for that question. As I indicated, the
direction of travel has improved considerably, with the
construction sector working positively to reduce the amount of
late payments. Working with the contractors’ umbrella body,
Actuate UK, and the new Get it Right initiative, I think we will
see some improvements. We are trying to get defects and
collection and completion certificates using processes developed
by the Get it Right initiative, which are going to be data-based,
to try to get a metric system which is more objective and less
subjective and which can measure performance and indicate at an
early stage whether it has been to the right standard. That will
go a long way towards allowing earlier payment on retentions.
(Lab)
My Lords, could not the Government introduce legislation that
separates any money that is being held and pay the interest to
the contractors, rather than the person who is benefiting
now?
(Con)
As the noble Lord from the Cross Benches said, there are many
suggestions as to how we go about doing this, and this is another
one. On statutory bans on cash retentions, my department is
fixated on trying to remove regulation from business, not
increase it. We are looking to the industry to come forward with
viable plans on how to make this work. Progress is being made and
more can be done, but there is still not complete consensus on
how to move this forward.
(CB)
My Lords, can the Minister explain why the Government are
dragging their heels over the anti-enterprise practices of cash
retentions and late payments, especially as SMEs in the
construction sector are running the highest rate of insolvencies
of any sector in this economy? Over the last three decades, the
SME market share has dropped in new housebuilding from 40% to
less than 10%, leaving the big housebuilders to increasingly
dominate a sector that continually fails to meet demand. Why is
there not more urgency?
(Con)
I thank the noble Lord for that question. There is urgency, to
the extent that we are consulting the industry, which has
demonstrated that it can improve these terms. We have put the
road map together and it is being worked on, but we need
consensus in the industry to do that. I understand the concerns
of SMEs, but transparency on data, as well as a metric system
which shows more transparency and more independent KPIs on work
being delivered, will go a long way, and that is what the road
map envisages.
