Construction Industry: Cash Retentions

Debate between Lord Spellar and Peter Aldous

Thursday 27th February 2020 Westminster Hall

[Peter Aldous (Waveney) (Con)]

It is a pleasure to serve under your chairmanship, Mr McCabe. I congratulate the hon. Member for Kilmarnock and Loudoun (Alan Brown) on securing the debate. As he mentioned, he and I both have form on this subject, in that we have both introduced ten-minute rule Bills to address the deep-rooted problems associated with cash retentions in the construction industry. He presented his Construction Industry (Protection of Cash Retentions) Bill in 2017, and our former colleague David Simpson initiated a debate in this Chamber in January 2016 following the collapse of the Patton Group in Northern Ireland. That left £10 million of retention moneys outstanding, which SMEs never saw again. My own ten-minute rule Bill was presented on 9 January 2018, a week before Carillion collapsed with £800 million lost to creditors, many of which were SMEs caught with retentions outstanding.

The problem has plagued the construction industry for a long time and should really have been addressed in the 1990s when Sir Michael Latham produced his report, commissioned by both the Government and the construction industry, entitled “Constructing the Team”. It had a significant impact on the industry and led to part II of the Housing Grants, Construction and Regeneration Act 1996, generally known as the Construction Act. Unfortunately, one of Sir Michael’s recommendations remains outstanding and has never been implemented. That relates to cash retentions being retained in a secure trust fund. Two and a half decades on, we really should now be putting right that glaring omission. It is a scar that has blighted and held back the construction industry for many years and caused personal anguish and distress to the proprietors and staff of many businesses.

[John Spellar]

Is not the situation exacerbated by the fact that contractors and indeed their employees are way back in the list of preferred creditors?

[Peter Aldous]

That is true, and reminds me of something else I am handling at the moment where Her Majesty’s Revenue and Customs is put right at the top of the list. The right hon. Gentleman makes a good point.

The hon. Member for Kilmarnock and Loudoun has explained the problem and I shall not go into much detail about it. Retentions are ostensibly held as security in case a firm fails to return to rectify defects. In practice, they are often withheld to bolster the working capital of the group withholding them. Under standard industry contracts, they should be returned within 12 months of the handover of the works in question, but there are regular delays, often of up to three years. I have seen one case of a delay of 12 years, and some retentions have even been held in perpetuity, as they are never returned. Most of that cash is provided by SMEs. No other industry puts so much cash at risk and places such burdens on its small businesses. That abuse of retentions has a negative knock-on domino impact that cascades through the construction industry. It restricts investment in new equipment and facilities, prevents firms from taking on more work, and disadvantages them in relation to employing more people and investing in apprenticeships. At a time when we need to build more homes and invest in infrastructure, the construction industry should be operating at full throttle. Instead, owing to the self-imposed brake of retentions abuse, it is struggling to get out of third gear.

What is the solution? There have been many failed attempts to solve the problem voluntarily, and they have all got nowhere. We can continue to go round and round in circles, but we should be introducing a statutory solution with legislation that secures the moneys so that they will be able to be returned, subject to the other party having recourse to the money. The Construction (Retention Deposit Schemes) Bill that I presented and the hon. Member for Kilmarnock and Loudoun kindly supported proposed that retentions should be retained in a Government-approved scheme. That would operate in a similar way to what is required for shorthold tenants under the Housing Act 2004, whereby deposits taken from them must be placed in an approved scheme. Ring-fencing the moneys in that way will mean that they will be secure, and available to be released on time rather than, as currently happens, after a wait of three or more years—if ever. That will help to increase the velocity of cash in the system, and if moneys are secured in that way banks will be able to lend to firms on the back of such security.

It is appropriate to look briefly at the situation in other countries. The UK is now very much out of step with what happens elsewhere, where there is legislation ring-fencing cash retentions and/or providing security for construction payments in general. In Canada and the United States there is a system of charges that can be placed on a building or structure by a firm that has not received its payments. Australia and New Zealand have legislated to ring-fence the money. France has a statutory framework that requires bank guarantees to be used as security for payment in the construction industry. The Bill is a relatively straightforward one that amends the Construction Act and requires the Secretary of State to introduce regulation to protect moneys.

[Peter Aldous]

I believe that the Bill is the framework for resolving the issues, and an awful lot could flow from putting it in place.

A retention deposit scheme seeks to safeguard the money. Cash retentions can still be deducted as security, but they in turn must be secured by depositing them in the scheme. Failure to do so will mean that any contractual clause enabling the deduction of cash retentions would be invalid. The Bill would finally bring closure to the many efforts that have been made over the past two decades and before to address the problem. In doing so, it would transform the prospects of many SMEs that make up the vast majority of firms in the UK construction industry.

To the outside world, nothing has happened since January 2018. The Brexit impasse brought the machinery of government to a halt. However, behind the scenes, a fair amount has been going on. As a result of the outstanding efforts of the Building Engineering Services Association and the leading electrotechnical and engineering services body, the Electrical Contractors’ Association, the January 2018 Bill secured the support of more than 80 industry bodies and trade associations, representing over 580,000 businesses and sole traders. It was the largest fair payments campaign ever formed in the UK, representing every level of the supply chain from across the construction and engineering professions. The British Chamber of Commerce, the Federation of Small Businesses and the Institute of Directors were also supportive. Only last week, Suffolk-based Breheny Civil Engineering, one of the largest privately owned regional civil engineering contractors, wrote to me in support of the Bill.

In the last Parliament, the Bill received strong parliamentary support, with more than 250 MPs from across the political spectrum indicating their support. Indeed, on the list that I have before me, in perfect alphabetical symmetry I am second from the top of the list and the Minister is second from the end. It is appropriate to acknowledge the work of previous Ministers at the Department for Business, Energy and Industrial Strategy who recognised the need for change, in particular my hon. Friend the Member for Rochester and Strood (Kelly Tolhurst) and our former colleague Richard Harrington.

Richard convened a roundtable meeting of industry representatives to address the problem. He very kindly ensured that I received invitations to the opening session in October 2018 and the concluding one in May 2019, although by then he was no longer a Minister. He made absolutely clear at the outset that doing nothing was not an option, and that we cannot continue to kick this particular can down the road. I got the impression that he wanted this reform to be his legacy from his time in office. Unfortunately, it was not to be. The outcome of the roundtable was not conclusive, though, on balance, my sense is that there was a clear preference for a retention deposit scheme as the Bill proposes, rather than an alternative surety bond-based solution.

Over the past 18 months, pay2Escrow has been modelling how a retention deposit scheme could work. The hon. Member for Kilmarnock and Loudoun outlined that scheme; pay2Escrow has taken me through its proposals, and I understand it has made presentations to officials at BEIS. I would anticipate that the Minister has been briefed on those.

I presented my ten-minute rule Bill 10 days before the Government’s consultation on retentions closed. Yesterday, they published a summary of the responses. Of the 52 responses in Citizen Space, 60% thought that a retention deposit scheme could apply to the whole sector. Of the seven business representative organisations that responded to the same question, 71% considered that an RDS could apply to the whole sector. Some 82% of 55 responses in Citizen Space believed an RDS should set up on a statutory footing. Of the eight business representative organisations that responded to the question, 75% believed an RDS should be set up on a statutory footing. The Minister concludes his foreword to the summary by stating:

“We will continue to work with industry on these issues and the policy options for addressing the problem of unjustified and late payment of cash retentions.”

Will the Minister address three questions? First, does he agree with Richard Harrington that doing nothing is not an option? Secondly, will he facilitate a pilot for the retentions deposit model that has been worked up? Finally, will he work to secure Government time for the passage of the Construction (Retention Deposit Schemes) Bill?

[John Spellar]

The hon. Gentleman has done a tremendous amount of work on this issue. What does he think is the Government’s underlying problem? Where in government does he think is the blockage against what is universally agreed to be a desirable solution? Who is holding this up?

[Peter Aldous]

I will try to answer, although I think the Minister is the best person to do so. First, there was the Brexit impasse, when nothing happened. Secondly, over the years, the main contractors have probably thwarted it, saying, “No, it’s going to cause us cash problems and the whole edifice will be crumbling down.” That said, some people in those firms who initially said, “No, you don’t want to go down this line,” have actually changed their tune, and now say, “Come on, let’s get on with it.” Thirdly, there has been concern that it is too difficult to put in place, so we should put it in the “too difficult” tray. The point of the pilot and the work over the last 18 months is that a solution is now ready to go. Those are the reasons I think things have not happened for a long time, but now is the time.