Thursday, November 23, 2017

Retentions at heart of productivity woes

Repeated delays to proposed reforms of the payment retentions system are undermining the construction industry’s efforts to improve its productivity, according to the Building Engineering Services Association (BESA) and electrotechnical and engineering services trade body the ECA.

The industry continues to face government and client criticism for delivering projects behind time and over budget, but the withholding of almost £8bn in payments due to sub-contractors in the past three years makes it increasingly difficult to improve supply chain efficiency.

£45m worth of cash retentions was also lost entirely to the sector in 2015 due to upstream insolvencies, according to the two bodies.

The government has announced a further consultation on the retentions problem despite the Department for Business, Energy and Industrial Strategy already acknowledging that “unjustified late and non-payment of retention monies is a significant issue for some contractors”.

Withholding money strangles contractors’ cash flow and puts them at risk of bankruptcy. This in turn puts jobs at risk and undermines investment in the people, skills and technologies needed to improve the sector’s performance, according to BESA and the ECA.

The management consultant McKinsey has estimated that the construction industry’s productivity has been falling for 20 years and now costs its businesses and clients almost £15bn a year.

In their recent joint business survey, covering Q2 this year, BESA and the ECA found that 63% of firms were not being paid within 30 days by their public sector clients, which contravenes the government’s own prompt payment legislation. On top of that, 39% of respondents said more than 3% of their turnover was tied up in retentions by firms further up the supply chain.

“This behaviour starves firms of the cash flow they need to invest in new people, skills and technologies,” said BESA legal and commercial director Rob Driscoll. “One of the consequences is that many of our projects arrive late and over budget.

“As a result, potential investors view the sector as risky and that makes them reluctant to release the level of funding needed for future projects. All of which has a serious knock-on effect for the wider economy. However, despite the weight of evidence, the government has chosen to consult yet again on the retentions issue.

“It smacks of delaying tactics, but hard-pressed SMEs cannot afford to wait any longer for the money they are owed,” said Mr Driscoll.

The ECA’s director of business Paul Reeve called for “a firm commitment to remove the retentions issue completely, in order to boost UK PLC”.

“There is an enormous weight of independent evidence already available that shows the extent of this problem so it is hard to see what more can be learned from another consultation. The ECA and BESA will continue to call on the government to ensure that all cash retentions are held in trust as soon as possible, and to phase them out entirely by the early 2020s,” said Mr Reeve.

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