Obstruction of progress
In the last three years, £7.8 billions in retentions have gone unpaid. MBS looks at the numbers which paint a picture of how this affects not only individual companies, but the construction industry’s ability to modernise, train and deliver.
Retentions were put in place to ensure that contractors completed all the work required of them, and in theory any monies held back would be paid at the end of an agreed liability period.
This holding period was intended to be between six months to a year. However, research by the Building Engineering Services Association (BESA) shows that on average the length of a retention is 18 months. And that’s if things are going well. When economic conditions are tough, Tier 2 contractors wait an extra seven months; and Tier 3 contractors can be without payment for over nine months more than expected.
In fact, Tier 2 contractors didn’t receive retentions upon practical completion of 37% of all contracts; and for Tier 3 it was 35% of all contracts. Over the last 3 years, over 50% of contractors report they have experienced non- payment, partial or full.
Smaller contractors suffer most. Cash owed to them is withheld because of contract loopholes; or lost completely because a contractor further up the chain becomes insolvent. Many SMEs in this sector know the frustration of writing off withheld retentions money simply because they can’t afford lengthy and expensive legal action to reclaim what’s owed.
BESA research shows that taking legal action over the last three years averaged £16,300 per contractor, and with adjudicator fees at £200 to £400 per hour, the costs are prohibitive.
The impact goes beyond individual SMEs. The amount of cash held back without good reason by the retentions ‘system’ means that a huge slice of construction finance isn’t available for other activities. In the last three years, £10.5 billions of turnover were withheld, and £7.8 billions were unpaid.
BESA asked its members what they would do if cash flow was not hampered by retentions.
Almost half said they would invest in new equipment and facilities, and 40% said they would look to take on more work. Significantly, 29% would employ more people and 22% would allocate the money to apprenticeships.
Abuse of retentions is holding back growth, reducing potential employment and impacting on apprenticeships. The numbers show that this practice hampers the industry’s ability to deliver the government’s vision of more housing and better infrastructure through training and adoption of new technology. It seems the money simply isn’t there to allow construction to move forward.
One of the main problems with retentions is not just that payments are withheld, sometimes on the basis of the flimsiest of contractual loopholes. The fact is that the money which is held in the bank accounts of the Tier 1 contractors. In fact, 37% of Tier 1 contractors use retentions for their own working capital. And 29% use it for general expenditure; 11% use it to fund the project that the retention is from. None of this is illegal, and nothing prevents holders of retentions using the money for their own purpose. It seems to go a long way to explaining why hanging on to retentions for as long as possible is so widespread.
Beyond the issues of how the money is used, is the problem of what happens if the company holding the retentions cash goes bust. The retentions money isn’t protected in any way. If they’re lucky, the other contractors may be treated as creditors. But that’s a long bet and 44% of contractors experienced non-payment due to upstream insolvency, with the average amount lost of £79,000. The longer a retention is held, the greater the risk of insolvency.
BESA and ECA aren’t trying to rid the industry of retentions altogether. But they are trying to ensure that retentions are held by accredited third parties in separate bank accounts. Retentions deposits would not be included in any calculations should a contractor become insolvent – ensuring that those further down the supply chain don’t lose out. The proposal includes points of contractual handover, so that parties depositing retentions can object if they say work has not been completed according to the contract. An adjudicator will make decisions in this case.
It’s a relatively simple scheme, based on the one used to hold tenants’ deposits in the private rented sector. Both sides are protected, and abuse can be minimised. If the construction industry is to move forward and achieve all that has been set out in the Construction Industry Sector Deal (see Construction Sector Deal), then the millstone of retentions abuse has to be dropped. Only then can construction modernise, train and take on new people with confidence.