Tuesday, February 2, 2016

MPs turn up heat on retentions

Following calls to their MPs for help from over 30 members of the Building Engineering Services Association (BESA), MPs have called on the government to speed up planned reforms to the “outdated” practice of payment retentions that cost construction SMEs more than £40m last year.

In a Westminster Hall debate, Small Business Minister Anna Soubry faced a barrage of evidence from MPs representing BESA and other constituency companies, who have been left “literally on their knees” because of unfair and late payment practices across the sector.

They said thousands of sub-contractors, in particular, were being “abused” and on the brink of bankruptcy despite rising workloads across the sector.
Shadow Business Minister Bill Esterson said momentum was gathering behind a Parliamentary bid to have an amendment on late payment inserted in the Enterprise Bill, which is to have its second reading in the House of Commons next week.

David Simpson, MP for Upper Bann in Northern Ireland, led the 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 added that a retention is typically 5% of the contractor’s total price and often outweighs their entire profit margin leaving many small businesses close to financial collapse.


Mr Esterson, who is MP for Sefton Central in Liverpool, added that cash flow was absolutely vital to sub-contractors “because of the low levels of capitalisation in construction supply chains”. He said banks would not lend to SMEs in the sector because large parts of their working capital are retention monies and, by definition, unsecured.

Other MPs who contributed to the debate, which agreed unanimously that more urgent action was required, included: Jim Shannon, Margaret Ritchie, Alan Brown, Alison Thewliss and Gavin Robinson.
Ms Soubry said they were “banging on an open door”, but urged them not to seek an amendment to the Enterprise Bill and to wait for the current governmental review of retentions, chaired by Crossrail chief executive Andrew Wolstenholme, to report at the end of this year.

She accepted the need for reform, but said there would still have to be some form of retentions in order to make sure “snagging” works were carried out to the client’s satisfaction.

Anti-retentions campaigner Debbie Abrahams, MP for Oldham East and Saddleworth, said it was “hugely disappointing” that after acknowledging the problem over 10 years ago the government had still not legislated on retentions. She congratulated the Specialist Engineering Contractors’ (SEC) Group for its relentless campaigning on all aspects of unfair payment to sub-contractors and for being “the voice of this issue”.
Mr Simpson added that it was an issue that went “right to the core of small business” and should be seen as a priority by a “pro-business government”.

The BESA welcomed the intervention of the powerful group of MPs representing constituents from all across the UK. It also said the ongoing government review was helpful, but shared the politicians’ concern that the process was taking too long.

The Association’s legal and commercial director Rob Driscoll said the industry was “as close as it has ever been” to solving the retentions and 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 growth/productivity”, he added.

“The argument is not about the problem, but the best solution,” said Mr Driscoll.

Martin Burton, chairman of the BESA Commercial and Contractual Committee, who sits on the SEC Group board and Build UK Payment Leadership Group, said there was a fundamental and structural conflict of interest in the retentions system.


“The government has acknowledged the inherent problem that the party holding the retention monies is also arbiter over whether a contractual problem has arisen,” he said. “This allows them to access those funds to off-set losses incurred against the purported problem.”

Mr Driscoll added that the BESA and its allies had been successful in having the equally unfair practice of ‘paid when certified’ outlawed in 2011; so there was no reason to believe they could not eventually achieve the same success over retentions. He has also been leading the BESA campaign for wider use of digital payment processes to improve transparency.

The BESA chief executive Paul McLaughlin added that retentions had their place “so long as people settle up in the end…it is the unsecured part of retentions that creates problems for contractors because the money can often disappear in a puff of accountants’ smoke”.

He said the BESA, which is a member of the SEC Group, had made significant headway on the issue and called for retention payments to be placed ‘in trust’ so sub-contractors would be protected in the event of an insolvency further up the supply chain.

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