MPs rally behind Retentions Bill to protect SMEs
A group of MPs are lending their support to proposed new legislation that could provide a welcome boost to the finances of thousands of SMEs working in construction related sectors.
Peter Aldous, MP for the Suffolk constituency of Waveney, will introduce a Private Member’s Bill on January 9 in a bid to have an amendment made to the 1996 Construction Act that would ensure all retention payments are held in a third party trust scheme.
This method for protecting SMEs in the construction supply chain from the threat of insolvency and payment uncertainty has been developed in tandem with the Building Engineering Services Association (BESA) and the electrotechnical and engineering services body ECA.
“I have been aware of retentions as an issue for a while, and with construction being a tough industry and uncertainty surrounding many aspects of the economy, small businesses need as much support as possible,” said Mr Aldous at the launch of the Bill.
He added that he was working to protect the livelihoods of more than 280,000 construction SME’s nationwide as well as a number of BESA and ECA members in his own constituency, who had brought the problem to his attention.
“Over the past three years, £700m worth of retention payments to small businesses were lost due to the insolvency of a client,” said Mr Aldous, who has been MP for Waveney since 2010 and was previously a member of the Environmental Audit Committee.
“If a small business suffers from an upstream insolvency of this kind, they are punished twice: Firstly with the loss of work, and secondly with the loss of retention money. We therefore need action on this before more millions are lost,” he added.
“SMEs are the backbone of the UK economy, which is why they need support and protection. This Bill is not about abolishing payment retentions; it is about making sure that people’s money is safe so that businesses can grow and invest in their future.”
Almost £8bn worth of cash due to SME contractors has been held in retentions over the past three years, according to research carried out by consultants Pye Tait for the Department of Business, Energy & Industrial Strategy (BEIS), which is also currently conducting a public consultation on retentions that runs until January 19.
The research also revealed that, on average, £27,500 is held in retention per contractor and that, in an industry of 280,000 SMEs, 44% of contractors had suffered non-payment through upstream insolvency in the last three years. Most of the sub-contractors surveyed in Pye Tait’s research also pointed out that payment retention “does not act as an impetus to correct defects”, which is (at least ostensibly) its main purpose.
Rather, it is “professional reputation and commitment to quality, in addition to the desire to maintain good working relationships with the main contractor” that ensures a firm will come back to make good any problems. It concluded that, in an industry where reputation is crucial to a company’s cash flow and ability to tender, this is the strongest incentive.
Without access to retention money, SMEs are starved of vital funds needed to invest in training, recruitment and new technologies. As a result, the industry continues to suffer from poor productivity, which delays projects at the expense of everyone involved; including clients – and contributes to the poor image of an industry struggling to fill its growing skills gap.
“Legislation that ensures retention monies are protected and used for the purpose for which they are intended is long overdue,” said Alexi Ozioro, policy co-ordinator at BESA. “We have reached a tipping point and the government must legislate – the time for voluntary ‘codes of practice’ and other initiatives is long past.
“Retentions could and should be paid in line with an agreed timetable when certain conditions are met and work signed off,” said Mr Ozioro. “Without this legislation, we are storing up serious problems.”
New Zealand put legislation in place earlier this year to ensure money owed to sub-contractors is held in trust. This came about because of the collapse of one of its largest construction firms – Mainzeal Property and Construction – in 2013.
When it went into liquidation, the company was holding NZ$18m of sub-contractors’ money in retentions. This was designated as ‘unsecured debt’ by the liquidators and was, therefore, not repaid. One electrical sub-contractor alone lost NZ$800,000.
Mr Aldous’ Bill aims to ensure that, if there was a similar episode in the UK, it would not trigger the same kind of catastrophic domino effect for SME’s in British supply chains.
The Federation of Small Business says that 37% of our SMEs have cash flow problems and that 30% have been forced to use an overdraft, as a result of delayed payments, in order to keep operating. 99% of built environment firms are SMEs and small, specialist companies are often responsible for more than 60% of the value of a construction project and will, therefore, play a vital part in underpinning the UK’s post-Brexit growth.
“There is also powerful evidence that retentions actually lead to higher business overheads because companies have to spend so long chasing payment,” said Mr Ozioro. “They also drive up construction costs for clients as a result of contractors increasing prices to cover the impact of retentions.
“Research conducted by Fenwick Elliott back in 2011 showed that wider use of Project Bank Accounts, for example, to protect retention monies could achieve savings of 2.5% of costs on construction projects. In an industry with razor thin profit margins this could make all the difference.”
The government has repeatedly stated its support for innovation, efficiency and skills in the construction sector and, as part of its recently unveiled Industrial Strategy, announced a ‘sector deal’ for the industry.
This includes financial support for research and innovation to improve the industry’s productivity in order to underpin the country’s ambitious house building and infrastructure targets. However, this laudable aim will be undermined if cash flow continues to hamper SMEs and retentions remove their room for manoeuvre and innovation, according to BESA and the ECA.
“Way beyond those companies who are damaged by upstream insolvency, even the possibility of losing retention money in this way hampers small business investment and growth,” said Paul Reeve, director of business and external affairs at the ECA. “As such, this Bill is entirely consistent with the aims of the new Industrial Strategy, which looks for innovation, and investment in skills”.
BESA director of training Tony Howard added that the average amount withheld from each contractor was equivalent to the co-investment needed for 15 apprentices a year under the new Apprenticeship Levy scheme.
“And if you are a non-levy payer, that amount would more than cover the salary of an apprentice, with a van, with some money left over for new tools and equipment,” he said.
“We are missing the opportunity to recruit around 3,000 new apprenticeships in building engineering services alone because of money sitting in unsecured accounts. Making that money available would help the industry meet the aims of the government’s Industrial Strategy.”
BESA and the ECA are urging their members, and anyone else interested in improving the efficiency of construction supply chains, to respond to the BEIS consultation on retention payments by making their views known at the second link below.