Construction Sector: Cash Retentions

Lord Aberdare Excerpts

Tuesday 10th September 2024 Lords Chamber

Asked by

[Lord Aberdare]

To ask His Majesty’s Government what plans they have to end the practice of cash retentions in the construction sector.

[The Parliamentary Under-Secretary of State, Department for Science, Innovation and Technology (Baroness Jones of Whitchurch) (Lab)]

My Lords, I pay tribute to the work of the noble Lord in championing this issue so successfully over the years. The Government are committed to amending the Reporting on Payment Practices and Performance Regulations 2017 to require firms to report on their policies and provide key metrics in relation to retentions. We intend to introduce legislation for this in 2024. We will consider whether further action on retentions is needed to deliver our manifesto commitment to tackle late payment.

[Lord Aberdare (CB)]

My Lords, I am grateful to the Minister for that response. Cash retentions—withholding payments due to subcontractors for work done, often for an unreasonable period of time, or indeed for ever—have a highly damaging impact on the ability of small construction firms to invest, expand or even survive, and create pressure to cut corners on quality and safety. The Grenfell report is a shocking reminder of where that can lead.

There is a long-standing goal of ending retentions by 2025—I welcome what the Minister has said about the implementation of the reporting requirement—and widespread industry recognition that legislation is needed to achieve this. What plans do the Government have to introduce such legislation, thereby freeing thousands of construction SMEs to play their full part in delivering the Government’s housebuilding goals?

[Baroness Jones of Whitchurch (Lab)]

My Lords, we are prioritising bringing forward the statutory instrument to amend the Reporting on Payment Practices and Performance Regulations this year, with the aim of it coming into force in 2025. This will require large firms to report twice per financial year on their policies in relation to retentions, including standard terms for holding retentions and metrics in relation to payment performance for retentions. We believe that this information will be most useful to small firms in the supply chain, and this legislation was developed in conjunction with firms in the industry and their representative organisations.

--- Later in debate ---

[Lord Aberdare (CB)]

My Lords, the Minister mentioned taking the views of industry. The Government have been taking the views of industry since the completion of their consultation in 2020. The reason that they have not come to a conclusion is that there is no consensus with the industry. I greatly miss the contributions of Lord Stunell, who described seeking a consensus on this issue as being like asking lions and lambs to sit down together and agree on a menu for tea. There is no consensus between the larger and smaller firms, which is why the only solution seems to many in the industry to be legislation. Reporting is all very well, but it will not solve the problem on its own.

[Baroness Jones of Whitchurch (Lab)]

My Lords, we have been working to resolve the problems associated with cash retentions through the Construction Leadership Council. As the noble Lord said, there are a wide range of views across the sector about the use and problems associated with retentions and how they might be addressed. Many in the industry are in favour of reform and are now calling for a legislative ban, in the way that the noble Lord described, but any policy solution must be sustainable and work for the whole of industry and its clients, addressing both the surety and fair payment issues that are thrown up.

Reporting on Payment Practices and Performance (Amendment) Regulations 2024

Lord Aberdare Excerpts

Monday 26th February 2024 Grand Committee

[Lord Aberdare (CB)]

My Lords, I welcome these regulations, although I would have liked them to go even further. Prompt payment, as the Minister said, is vital to smaller construction firms, particularly at present, when a recent report from the Begbies Traynor Group found that the construction sector had the highest number of at-risk businesses in the UK, more so than any other industry. That is 83,000 firms in significant financial distress. Late payment and retentions are key issues exacerbating these problems for small construction firms, as larger companies higher up the supply chain seek to hold cash in their accounts for as long as possible, thereby adding to the challenges for smaller firms of inflation and increased costs of materials, energy and other necessities. Borrowing is often no longer an option for many SMEs. Therefore these regulations, requiring greater transparency of payment reporting, represent a step forward in keeping larger companies accountable and reinforcing the Government’s efforts to support SMEs by establishing prompt payment as the norm, not the exception.

The requirement to report on invoices both paid and unpaid by value, not just by volume, is particularly welcome. Even if the number of invoices paid within the time specified—30 days, 60 days or more than 60 days—represents a high percentage of all invoices, the total percentage value of those invoices may be significantly lower, because lower-value invoices tend to be paid more quickly. The requirement for senior management to sign off on the figures reported is also a laudable step forward.

However, there are some disappointing omissions from the regulations. The Government’s consultation response last November promised to introduce “reporting on retention payments”—that is, the withholding of a proportion of payments due to subcontractors for work they have completed—for businesses in the construction sector. Perhaps the Minister can tell us something about when and how this will happen, even if it may be too much to hope that he might give an indication of how the Government might move towards ending the pernicious practice of retentions altogether. It is high time that happened, after so many years of government consultations and considerations but no conclusions.

The consultation response also promised more active and visible enforcement of payment practice reporting requirements, but there is no reference to this in the regulations before us today. Reporting by itself will not solve prompt payment issues, so how will it be backed up by the enforcement measures promised by the Government? What will happen if a supplier to a government construction project reports consistent lateness in paying its supply chain, especially for higher-value invoices? Can the Minister say something about how and when this enforcement commitment will be met, including the plans for implementing changes to the role of the Small Business Commissioner to broaden its powers and increase its effectiveness in supporting small businesses?

I welcome the regulations as far as they go, but I look forward to hearing from the Minister how the Government plan to finish the job by introducing further regulations, hopefully quite soon, to ensure that reporting requirements are actually monitored and enforced and, above all, to begin finally to deal with the far too long-standing bane, blight, canker, plague, scourge—or whatever other synonym one may choose—of retentions.

[Lord Fox (LD)]

My Lords, we, too, welcome this statutory instrument in as far as it goes. When I saw that my friend the noble Lord, Lord Aberdare, was speaking, I knew that my speech would get shorter, because he has already covered much of the ground that I wanted to talk about. Late payment is just about the number one issue facing SMEs. If you listen to the organisations that represent them, it is the issue they always come back to. It will not be solved merely by transparency; we know that is the case. We have some transparency, but we are not getting solutions.

There is a culture in certain sectors. As the noble Lord, Lord Aberdare, just set out, some sectors are worse than others. SMEs rely on a small number of large customers. The Minister said that publishing information would help SMEs to make informed decisions about whom they would work with. However, in many cases SMEs do not have the luxury of a decision about whether to sell their product or service to one company or another. That is the market and those are the businesses that operate; if there is a culture of late payment or retention in that business and, if those SMEs want to continue to trade, they have no choice about with whom they will trade. There is very little jeopardy for those companies that continue to practise late payment. That is the point the noble Lord made about enforcement.

I will make one other point about the building sector. Although it is a somewhat dated example, we can go back to 2018 and the Sandwell hospital project, which was managed and run by a company called Carillion. When that company went bust, it was very clear that its entire cash flow was managed through the late payment and retention of its contractors and subcontractors. The transparency situation has not appreciably changed since then.

A big issue that has to change is the Government’s view to their management of public procurement. The issue of late payment came up a number of times when we considered the public procurement Bill. Can the Minister ask his department what it can do, using the new Procurement Act, to help bolster enforcement on these issues? From our point of view, we would make it compulsory to sign up to a prompt payment code then seek ways to enforce it. Without that, the small improvement of this statutory instrument will continue to leave many of our small and medium-sized businesses in a position where their cash flow is used for the benefit of their customers’ cash flow.

--- Later in debate ---

[Lord Johnson of Lainston (Con)]

I am grateful to the noble Lord, Lord Leong, for that point. We will have this data. I am looking, and average payment times between businesses peaked in December 2020 at 30 days and is now down to 35.6. I do not have the data in front of me for what it was before these regulations came in, but there is a very clear downward trend that can be seen in a chart in the report. I am happy to show noble Lords and to write with more specific information. The whole point about this exercise is to have the information to demonstrate what the trends are and who is not following the right courses of action.

[Lord Aberdare (CB)]

Before the noble Lord sits down, if that is the right phraseology, I have no doubt about the Government’s commitment to some of these further developments in reporting on retentions, for example. My question was very much about how and when that is going to happen, and why it does not happen. Here we have regulations which seem to me to be ideal for that quite simple reporting of retentions. It does not go nearly far enough, in my view, towards actually scrapping retentions, but it does at least produce the sort of transparency that the Minister is talking about.

[Lord Johnson of Lainston (Con)]

I thank the noble Lord, Lord Aberdare, for those points. The timeline is genuinely as soon as possible. We felt it was more important, given the timing of the cliff edge and the sunset around this legislation, to make sure that we extended that to 2031. I am aware, without speaking on behalf of my ministerial colleagues, that retention payments and issues around construction are absolutely on top of the priority hopper, so I hope the noble Lord will be satisfied with that.

Construction Sector: Cash Retentions

Lord Aberdare Excerpts

Monday 11th December 2023 Lords Chamber

Asked by

[Lord Aberdare]

To ask His Majesty’s Government what progress they are making in determining how to end the practice of cash retentions in the construction sector, and whether they plan to meet the 2025 target date for achieving zero retentions proposed by the Build UK Roadmap and endorsed by the Construction Leadership Council in 2019.

[The Parliamentary Under-Secretary of State, Department for Business and Trade and Scotland Office (Lord Offord of Garvel) (Con)]

I thank the noble Lord for his Question. The Government will add a requirement for reporting on retention payments to the Reporting on Payment Practices and Performance Regulations 2017. Work also continues with the Construction Leadership Council to reduce defects in construction and end the abuse of retentions. This includes supporting a pilot project with the Get It Right Initiative to reduce defects, as well as collaboration with the bodies responsible for construction contractual documentation, to discourage the withholding of retentions.

[Lord Aberdare (CB)]

My Lords, the announcement made last month, which was mentioned by the Minister, is a small step forward but it is too little, too late, and it does not go nearly far enough to end the bane of retentions, which cause huge damage to numerous small construction firms, and indeed to the sector as a whole. What further steps are the Government considering? Let me suggest two possibilities. First, they could ensure that the undesirability of retentions is included in the Construction Playbook, which sets out key policies and guidance on how public works projects and programmes are assessed, procured and delivered, but, rather shockingly, makes no mention of retentions. Or, secondly, they could put an effective system of enforcement in place for the measures he has just described when they are eventually implemented. If the Minister does not like those two ideas, I have at least half a dozen more that I could suggest to him.

[Lord Offord of Garvel (Con)]

I thank the noble Lord for that contribution. The Government understand well that the practice of cash retention can create problems in the supply chain, due to late and non-payment. We are committed to improving payment practices, but we have to work with the construction industry in this. The prompt payment and cash flow review report was just published on 22 November, and a key measure includes extending and amending the Reporting on Payment Practices and Performance Regulations, basically to increase transparency in this vital area to allow large businesses to provide data to the smaller companies to see how retention payments are working. We have to work with the construction sector in this.

The Construction Leadership Council has identified some solutions to mitigate cash retention payments. Our long-term aim is to remove the need for retentions altogether and, as I said, we are supporting the Get It Right Initiative and Cranfield University to reduce the rate of defects within the buildings commissioned across the public and private sector. The aim is to establish a quality metric as a viable alternative to the withholding of cash retentions as a form of insurance against defects. There is a lot going on. We are working with the industry and a lot of consideration has been given to this matter, but, ultimately, the construction industry itself needs to come to a consensus on how to improve this area.

Industrial Strategy

Lord Aberdare Excerpts

Tuesday 20th June 2023 Lords Chamber

[The Earl of Minto (Con)]

My Lords, I understand exactly the point that is being made. Communication is critical to any successful enterprise, and there is no doubt that the change from a unified industrial strategy to one that is more targeted and focused is, at times, not the easiest message to get across. However, I believe that the five growth sectors for which the specific strategies have been written will be very effective.

[Lord Aberdare (CB)]

My Lords, an essential part of any industrial strategy is a strategy for addressing the skills needs on which it depends. When the Minister reads the Make UK report that the noble Lord, Lord Fox, has just referred to, he will find that it sets out a long-term vision for UK manufacturing and highlights the failure of current apprenticeships policy to support manufacturers in developing the talent pipeline they need. When will the Government respond to the barrage of demand from employers for a more flexible apprenticeship levy, with greater incentives to offer apprenticeships addressing skills and labour shortages?

[The Earl of Minto (Con)]

My Lords, I think the whole House agrees with that point, and I can assure the House that the whole question of the apprenticeship levy and the flexibility thereof is being looked at closely right now.