Cash retentions have become a crippling problem for the construction industry, and a new bill hopes to take the first step in finding a solution. Tom Hogarth reports.
Although they have been a fixed part of the construction industry for a significant period of time, cash retentions in their current form are set to become a thing of the past, thanks to a new bill to implement mandatory deposit schemes for retentions.
According to research conducted recently by Pye Tait for the Department of Business, Energy & Industrial Strategy, almost £700 million in retentions has been lost in the construction industry over a three year period, due to insolvencies.
While this figure is shocking on its own, in the wake of the collapse of major contractor Carillion, it is estimated that the company was holding more than £800 million in cash retentions.
Nicknamed the ‘Aldous Bill’, the Construction (Retention Deposit Schemes) Bill was first introduced to Parliament by Peter Aldous MP on 9 January 2018. It proposes to create a statutory obligation on any company holding retentions to place them in a government-approved retentions scheme.
Cash retentions pose a day-to-day threat for SMEs of varying sizes, while also preventing further investment on the part of these companies into the future of the construction industry. Beyond this, the collapse of companies like Carillion, and subsequent loss of capital across the industry on such a large scale, could be crippling for both the sector and the economy.
At a press briefing for the bill, Peter said: “SMEs are acting as providing working capital for those at the top of the chain and that is, I think, having a significant impact on the way that the sector operates. It particularly has an impact on SMEs, which are very much at risk if there is an economic downturn.”
Peter pointed to research carried out by the Building Engineering Services Association (BESA), a supporter of the bill, which illustrates the extent of the problem. According to BESA, some 44% of contractors have suffered non-payment due to upstream insolvency in the last three years.
Almost half of businesses that have had retentions held in the last three years have experienced non-payment due to upstream insolvency, with the average amount lost per contract being £79,900.
“If SMEs have these debts hanging over them, it’s a disincentive to taking on more work,” said Peter. “It’s also a disincentive to employing more people, creating more jobs, and taking on more apprentices.”
The bill itself is quite simple, proposing a retention deposit scheme modelled on the tenancy deposit scheme introduced by the 2004 Housing Act. If a company wishes to hold retention monies, then they will be required to place these in a government-approved retention deposit scheme, which will release these monies to the appropriate parties on time, and only in the event that both parties are happy with the outcome of the contract.
In reality, this means that retentions will change very little, but they will be released at the correct time, as well as being safe from insolvency or abuse. As the scheme will be funded by the interest earned on deposits, and the profits will be donated to an industry charity, the new form of cash retentions will serve to add value to the industry, rather than crippling it.
Peter says the Aldous Bill is well-supported and likely to succeed, but has been a long time coming. Measures were initially proposed in 1994 by the late Sir Michael Latham, and a lack of action for the last 24 years has meant the UK has fallen behind the rest of the world.
“In many respects, we are laggard in the world as a whole as to bringing this type of scheme into play. If you look at Canada, the United States, you have systems there in place. In Australia and New Zealand, there’s legislation for a similar type of ring fencing. In France, you have bank guarantees to act as security for payments. So, we are looking to bring our industry in line with industry around the world,” said Peter.
With more than 30 trade associations and industry organisations in support of the bill, including BESA, the Specialist Engineering Contractor’s Group and the Scottish and Northern Ireland Plumbing Employers’ Federation, as well as what Peter describes as “parliamentary support from around the House”, the Aldous Bill has the support needed to help fix this vital issue.
The next step for the bill is a second reading in Parliament, currently scheduled for 27 April 2018.