Draft Reporting on Payment Practices and Performance (Amendment) (No. 2) Regulations 2024
(3 days, 10 hours ago)
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The Parliamentary Under-Secretary of State for Business and Trade (Gareth Thomas)
I beg to move,
That the Committee has considered the draft Reporting on Payment Practices and Performance (Amendment) (No. 2) Regulations 2024.
It is a pleasure to serve under your chairmanship, Ms McVey.
The regulations were laid in draft before the House on 7 October 2024. By way of introduction, let me explain that the regulations seek to amend the Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017. Let me give a bit of context to the issue. Prompt and fair payment has long been an issue in the construction sector and particularly affects small businesses in the supply chain. Holding what is known as retention money is a long established construction contractual practice intended to provide security against defective work or the insolvency of the subcontractor supplier. However, it can operate unfairly against smaller suppliers who can feel unable to question or to challenge how the practice is applied.
A retention clause allows the employer to deduct and retain a proportion of the value of the contract otherwise owed to the supplier until particular contractual conditions are met. Typically, 3% to 5% is held over the duration of the project and for a period post completion. The use of retention clauses in construction contracts can be particularly problematic to the supply chain due to late, partial or non-payment of retentions, or these being permanently lost through upstream insolvencies.
There has been an attempt to deal with this issue. Not everything the previous Government did was entirely wrong. This is one of those rare exceptions where the Government recognised that there was a problem in this space and were intending to introduce this regulation until the general election was called. Recognising the good intent behind this particular proposal, we have sought to lay it before the House again, and this is the result. What is not in the existing regulations, as they stand at the moment, is the requirement for specific reporting relating to retentions that are held under construction contracts, and this SI seeks to put that right. It will bring greater transparency in relation to the retention policies, practices, and performance of larger businesses that have construction contracts.
In the first instance, reporting will require a statement on whether the company's payment practices and policies include or do not include retention clause. Where a company makes a statement that retention clauses are included in its construction contracts, further information must be submitted. Details will be required on whether retention clauses are included in all its construction contracts, whether the company’s standard payment terms include retention clauses, or whether retention clauses are used only in specific circumstances, which it would need to describe. Details would also be required on whether there is a contract value under which no retention clause is included, and that value, whether there is a standard rate of retention applied and that rate, whether there is a practice of using retention clauses that is no more onerous than those that businesses upstream are subject to, and whether there is a description on the process for the release of the retentions that are held.
Two specific metrics will also be required: the percentage ratio of the amount of retention that is withheld from the company by its clients, which the company holds back from its suppliers, and the percentage ratio of the amount of retention that the company withheld from the total value of payments made to suppliers as a proportion of the amount paid to suppliers during the reporting period. Those metrics will help to provide smaller firms with better information about a large business’s retention payment practices, and by doing so, incentivise large businesses to improve those practices.
In conclusion, this is a measure that will provide small firms in the construction supply chain with information that will enable them to take decisions about entering into contracts and to understand how to ensure that retentions owed to them are paid. It will also create a clear incentive for firms to improve their payment performance in relation in relation to retentions. The Government are looking at the whole practice of late payment in in general terms. We have announced our intention to consult more broadly on what further measures we can bring in to tackle the problems around late payment, but this SI stands alone as a useful measure, and I commend it to the Committee.
Dame Harriett Baldwin (West Worcestershire) (Con)
It is a very great pleasure to serve under your chairmanship this morning, Ms McVey. I just note that the Minister highlighted the fact that, in fact, this initiative had been started under the previous Government, and so you would not expect me to be objecting to its passage today. But I do have, in the interest of scrutiny, a few questions for the Minister.
The explanatory memorandum accompanying the statutory instrument highlights the improvements that have occurred in the time that it takes to pay invoices since these measures were brought in in 2018. There was strong support in the consultation for extending the reporting requirements to these retention payments. Could the Minister summarise for the record what the objections were in the consultation and from whom they came—the people who did not support moving forward with these measures?
The Department will generally, it says in the explanatory memorandum, seek to encourage businesses to comply with the regulation by encouraging them, getting in touch with them rather than prosecuting them for non-compliance. Could the Minister highlight if there have actually been any prosecutions at all under the previous payment regulations, and, if so, who the holdouts or the big contractors that have resisted these measures have been?
Most companies say that this regulation will be an ongoing cost to their business. It is estimated to be a small amount of £10 million per year. Can the Minister outline for the committee any measures that he is planning that will reduce costs for businesses? Businesses are telling me that the extra cost of national insurance and the Employment Rights Bill are adding costs to their businesses that can be seen from space. The last Government introduced new requirements for firms bidding for large Government contracts to make sure that they pay small businesses on time, and those bidding for Government contracts over £5 million will have to demonstrate that they pay their own invoices within an average of 55 days, tightening to 45 days and then to 30 days in the coming years. Can the Minister confirm that he is planning to continue with that approach?
The last Government overhauled the voluntary prompt payment code, halving the time signatories have to pay small businesses to 30 days. Is the Minister planning to update us on the progress he has made on this matter in the last six months, and has the number of signatories gone up or down—it was 2,800 voluntary signatories. I look forward to the Minister’s answers and we support the measures today.
Daisy Cooper (St Albans) (LD)
In so many sectors, we have this enormous power imbalance between large companies and the smaller companies that they often contract through their supply chains, and construction is no exception. The Liberal Democrats have no objection to this and broadly welcome it. Anything that increases transparency is a good thing. Anything that tries to redress the power imbalance in those supply chains is also incredibly welcome.
I have just two questions for the Minister. As a liberal, I strongly believe in the power of incentives, and we always hope that incentives work. In many cases they do. My first question to the Minister is that if these incentives show that they do not work, will the Government have some system for monitoring that process? Is there some point at which, in the future, the Government intend to review the effectiveness of this legislation? Secondly, the Minister mentioned that more broadly the Government are looking at the issue of late payments: is he at liberty to mention, either now or at a later stage, the scope of that particular review and which sectors that might apply to?
Gareth Thomas
I am grateful to the hon. Members for West Worcestershire and for St Albans for their questions. On the question of the prosecution of firms, as I think I alluded to in my opening remarks, regulations on reporting did come into force back in 2017. To be blunt and to be candid in this forum, there has not been much enforcement of those regulations. We are seeking to put that right, and have written to over 500 firms who have not been complying with those regulations. There has not been a prosecution as yet, because we are still within the period that we want to give firms the chance to comply. If there is a refusal to comply, prosecution can take place, with potentially unlimited fines for non-compliance. Obviously, I very much hope we do not get to that to that stage, and that firms do respond appropriately to the correspondence from my officials to those firms who have not currently complied.
I cannot give the hon. Member for West Worcestershire a specific breakdown of which sector of the construction industry were opposed to this regulation. All I would say is that there was a very strong balance in the consultation responses that were presented to the last Government, as I understand it, in favour of the approach that we are taking now. On that basis, and as a result of conversations we have had since we got into government, we believe the measures are appropriate. That comes on perhaps to one of the issues that the hon. Member for St Albans raised about what happens if this does not lead to the to the outcomes that we want. Our sense is that it will work, that creating incentives has been shown to work to date. Build UK, which is a fairly representative organisation for the construction industry, has benchmarked construction businesses on their payment performance since 2018. Its work shows a significant improvement in terms of payment, and we hope a similar level of improvement will be achieved by the requirements in this SI. Under the regulations, we have the opportunity to come back if loopholes are spotted, and we will obviously keep that in mind and see how things develop.
More broadly speaking, the second question from the hon. Member for St Albans alluded to what else we are doing in the late payment space—a question that was touched on also by the hon. Member for West Worcestershire. We are getting ready to consult on a package of further legislative measures around payment practices. We are not quite ready to do it now, so I cannot tell the House that, but we will bring forward proposals shortly, and obviously the House will be informed at the appropriate time. We recognise this is a huge issue for small businesses. It has led, in many cases, to small businesses going bust and is a huge waste of time in terms of the productivity of small businesses having to chase late payments. I commend the SI to the Committee.
Question put and agreed to.