Construction Industry (Protection of Cash Retentions)

Alan Brown Excerpts

1st reading: House of Commons
Wednesday 26th April 2017 Commons Chamber

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

I beg to move,

That leave be given to bring in a Bill to make provision to safeguard, and for the release of, cash retentions in the construction industry; and for connected purposes.

When I secured this ten-minute rule Bill slot, I genuinely hoped it was going to be the start of new legislation, but unfortunately the right hon. Member for Maidenhead (Mrs May) was apparently so scared of what I was proposing that she called a general election. [Laughter.] Joking apart, this topic is very important.

A cash retention is the deduction of a portion of an agreed value of a contract—in effect, a cash bond. That cash is withheld by the main contractor to cover any snagging defects in an agreed maintenance period of one or two years. Usually the subcontractor will remedy defects at their own cost, as per the contractual terms and conditions, with the expectation of the retention being released promptly at the end of the contract period. That is where problems arise, when the retentions are not released in a timely manner, for various reasons—even worse, they may not be released at all.

The most common reason for non-release is a company going into liquidation, and so, for example, a Wirral-based company lost £240,000 over a five- year period due to insolvencies. A Scottish plumbing firm has lost £150,000 of retentions over five years, which is a huge amount for a small or medium-sized enterprise—SME. We must also bear in mind that Scottish plumbers have also been hit by the Pensions Act 1995, with the section 75 multi-employer pension debt issue. Some company owners are already at risk of personal insolvency, so the retentions issue is just another distraction that is not required. One SME steelwork contractor with an annual turnover of £3 million has retentions of £150,000, which is 0.5% of turnover. Given how low profit margins can be at the downstream end of the construction industry, that is a considerable sum.

Having worked in the construction industry, I understand the origins of the retention system and, to be fair, I also know how hard it sometimes can be to get a subcontractor back on site to address snagging issues. The reason for that is often that they have moved on to another job and so the resources are not immediately available. That said, it is seldom that subcontractors would not fulfil their obligations, and so when they do so they expect the money to be released when it is due to them. If they comply, why should they not receive the money in a timely manner? I ask the House: why, in the 21st century, are we dealing with unprotected cash retentions?

The loss of cash retentions comes with a human loss attached. According to the then Department for Business, Innovation and Skills, a survey of SMEs found 25% stating that a debt of

“£20,000 or less is enough to jeopardise their business prospects.”

As I have highlighted, retention losses are often much higher than £20,000, which means: thousands of jobs lost or facing an uncertain future; fewer opportunities to recruit new apprentices and for companies to invest in training; and a risk of individual bankruptcies following calls by banks on directors’ personal guarantees to pay off loans.

This Government continually acknowledge a productivity problem in the UK, yet we have smaller companies struggling with cash flow, stressed and having to put man hours into chasing up these cash retentions. Surely resolving this issue can only improve productivity, in terms not just of the man hours saved through not having to chase up the retentions, but of money released for investment in new equipment or job creation, which will further improve productivity. The issue of late payments has been understood by this Government, with action taken, but the release of retentions is the missing link in this payment chain and action has yet to be taken on it. To further illustrate the seriousness of this, I point out that in 2015 small firms across the UK lost almost £50 million-worth of retentions because of insolvencies up the supply chain. That money could have been re-invested, and a client somewhere along the line has to pay for the lost revenue. Approximately £3 billion-worth of retention moneys are withheld at any one time. I repeat that this can affect productivity, cash flow and profits.

In addition, the uncertainty of retention release means that banks do not allow borrowing against sums due to companies. That is not a new issue; it has been known about for a long period. The Banwell report, prepared for a Government 53 years ago, recommended the abolition of retentions, and 23 years ago the Latham report, a joint construction industry and government report, recommended that cash retentions should be at least protected in a trust account. We operate a tenancy deposit scheme to protect individuals in the private renting sector, yet for some reason there has still been no will on the part of Governments to do something with these construction “deposits”.

In 2002 and 2008, the Business Select Committee recommended phasing out cash retentions because they were outdated and unfair to small firms. When this issue was raised in a debate in Westminster Hall in January 2016, the Minister confirmed that there would be an evidence-based review, to be completed by the end of that year. I was a member of the Enterprise Bill Committee when we were told:

“It is fair to say that there is absolute cross-party agreement about the need to reform cash retentions in the construction industry. I am very open about it: I think they are outdated and I do not think they are fair. They are particularly unfair to small businesses.”

When I challenged the Minister about timescales, she told me:

“the hon. Gentleman can be assured that this Minister gives absolutely her word that this matter is not going to be kicked into any long grass. In fact it is very short grass, which has only just grown, because the review will be completed by March and then recommendations will go out to public consultation. If legislation is required as a result of that consultation, I will be happy to be the Minister to take that through.”––[Official Report, Enterprise Public Bill Committee, 9 February 2016; c. 47-48.]

Here we are in April 2017, the process has been kicked back all this year and now we have a general election, which will cause further delay. We are not just in long grass, but in long grass growing out of a sea of mud. Worse still, it is rumoured that the consultation which has been completed will be consulted on again, so we can now assume that any new Government will not move on this until after the summer recess. I plead for consideration of suitable secondary legislation to be enacted early in the new Session, whoever the new Government may be.

I have been contacted by companies in my constituency affected by the late release or non-release of retentions. One company, which wished to remain anonymous, would not name the company it had been having difficulty with, because it still has to tender for more work from the company withholding the money and so does not want to upset it. That is how that market share operates. I pay tribute to the Specialist Engineering Contractors Group, SNIPEF—the Scottish and Northern Ireland Plumbing Employers Federation—the National Federation of Roofing Contractors and the Builders Merchants Federation, which have been proactive in raising these matters with me. Simply put, however, these organisations and companies are fed up with the blockages from the Government.

The Scottish Government have been operating a “Project Bank Accounts” system to ensure subcontractors get paid on time when the Government pay the main contractor. Such a system could be adapted to include retentions. As I mentioned, the tenancy deposit scheme is the model that should be adopted for retentions. This scheme could already have been in place had the UK Government accepted the proposed amendment to the Enterprise Bill. Instead, this year alone, we have seen examples of £720,000-worth of retentions lost when TAL Ltd in Northern Ireland went into liquidation in January this year. In an article in The Times in February, a Welsh bricklayer director was lamenting that

“main Contractors treat retentions as their own money”

and that it can take five years to get bills settled.

Retention moneys are ring-fenced in separate accounts, in compliance with legislation, in countries such as the United States, Australia, New Zealand and certain EU member states. As I have outlined, we know what the problem is—it has existed for well over 50 years—we know that there is a solution that works, as it does in other countries, and the Government have acknowledged cross-party support for ending cash retentions. I have outlined today that this is a UK-wide issue that requires UK Government action, so I urge them to support the Bill. If I am lucky enough to be re-elected, I will continue to pursue this issue.

Question put and agreed to.

Ordered

That Alan Brown, Hannah Bardell, Callum McCaig, Gavin Newlands, Stuart Blair Donaldson, Bill Esterson, Alison Thewliss, Patricia Gibson, Corri Wilson, Dr Philippa Whitford, Mark Durkan and David Simpson present the Bill.

Alan Brown accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 12 May, and to be printed (Bill 174).

Business of the House

Ordered,

That the Order of 24 April 2017 (Business of the House (24, 25, 26 and 27 April) be varied as follows:

In paragraph (17)–

(a) after sub-paragraph (c) insert–

“(ca) proceedings on consideration of Lords Amendments to the Higher Education and Research Bill shall be brought to a conclusion (unless already concluded) two hours after their commencement;

(cb) the Lords Amendments to the Higher Education and Research Bill shall be considered in the following order: Nos. 1 to 12, 209, 210, 13 to 78, 106, 79 to 105, 107 to 208, 211 to 244;”, and

(b) in sub-paragraph (d), for “and (c)” substitute “to (ca)”.—(Heather Wheeler.)

Digital Economy Bill (Ways and Means)

Resolved,

That, for the purposes of any Act resulting from the Digital Economy Bill, it is expedient to authorise the imposition of charges which are payable to the Information Commissioner.—(Matt Hancock.)