Wednesday, February 10, 2016

Retentions – light at the end of the tunnel

Paul McLaughlin, BESA Chief Executive

Payment retentions are one of those necessary evils that have been a lurking shadow over construction supply chains since Victorian times.

We know we will never be completely rid of them, but we are closer than ever to having them reformed so that they become a more positive force for change – and not just an underhand way for large firms to protect their profits at the expense of SMEs.

There is nothing fundamentally unfair about the principle of a payment retention. As domestic consumers we are all used to holding onto that final payment before signing off on work carried out by tradesmen in our homes. What makes retentions different in the commercial construction context is that the principle is often missing – in many cases the retention holder has no intention of ever settling up and regards a sub-contractor’s 5% final payment as his margin.

This profoundly unfair and hugely damaging practice has been acknowledged as unprincipled and just plain wrong by politicians for some time now, but reform backed by legislative teeth has been painfully slow in coming.

However, Minister for Small Business Anna Soubry told an open Westminster Hall debate last week that campaigners, like the BESA and our umbrella body the Specialist Engineering Contractors’ (SEC) Group, are “banging at an open door”. 30 members of the BESA had enlisted the help of their constituency MPs to put further momentum behind our campaign for change and so our voice was well represented in what was an extremely forceful and frank debate.

The Minister is up for driving through reform although she insisted that some form of retentions will have to remain to cover ‘snagging’ works – and we have no argument with that so long as it is fair.

For a “pro-business” government the fact that sub-contractors lost £40m in unpaid retentions last year should be right at the top of the agenda – particularly if it wants to see ambitious infrastructure projects come to fruition. You can’t build anything properly with a dysfunctional supply chain constantly fighting over money and with sub-contractor companies delivering crucial specialist skills facing ruin because of withheld payments.

David Simpson, MP for Upper Bann in Northern Ireland, led last week’s debate by telling the Minister that some sub-contractors had been forced to wait up to 10 years for retention payments in the most extreme cases. He said there were companies in his constituency “literally on their knees” because of unfair and late payment that starves them of vital working capital.

Shadow Business Minister Bill Esterson said momentum was gathering behind a bid to have an amendment on late payment inserted in the new Enterprise Bill, which is currently progressing through Parliament. He also made the key point that banks will often not lend to sub-contractors because they suffer retentions, which are unsecured debts.

The political will is there across the parties and I think we can confidently say we are as close as we have ever been to solving the unfair payment problem. The wrongful deduction of retentions is crippling the working capital of the supply-chain and stifling R&D, investment in technology, skills and productivity.

Huge credit must go to the SEC Group and to our own legal and commercial team led by Rob Driscoll for get us tantalising close to really meaningful change and doing so, not by constantly complaining, but by providing workable solutions. For example, a good first step would be the universal adoption of digital payment across the construction sector as this will improve transparency and remove several excuses for delaying payment. This is a ‘no brainer’ because it delivers business efficiency benefits on a number of fronts for everyone involved.

We will also continue to press for retention monies to be placed ‘in trust’ so they are protected from main contractor insolvency and any forms of financial trickery, which can see SMEs profits disappearing in a puff of accountants’ smoke. Again what’s not to like about that; unless you have some murky reason for keeping your hands on other peoples’ cash?

And to those who say this is one of those problems that will never go away, I would point out that Rob and his colleagues played their part in having the equally unfair practice of ‘paid when certified’ outlawed in 2011. So, let’s keep the faith.

We are close, but no-one is cracking out the cigars just yet.

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