Reporting on Payment Practices and Performance (Amendment) (No. 2) Regulations 2024

Baroness Gustafsson Excerpts

Monday 13th January 2025 Grand Committee

Moved by

[Baroness Gustafsson]

That the Grand Committee do consider the Reporting on Payment Practices and Performance (Amendment) (No. 2) Regulations 2024.

[The Minister of State, Department for Business and Trade and Treasury (Baroness Gustafsson) (Lab)]

My Lords, these regulations amend the Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 to introduce requirements for in-scope businesses to publish certain information twice per financial year about their retention practices, policies and performance where retention clauses are included in construction contracts.

Tackling late payments is critical for the UK economy’s growth and productivity. Fifty-six million hours are wasted each year by businesses chasing late payments, imposing a considerable and unfair burden on small businesses. Long payment terms and late payments are a causal factor in an estimated 50,000 UK business closures each year.

This Government are committed to addressing the issue of late payments. In September, we announced a package of measures to improve payment practices and help small firms. This included the launch of a new Fair Payment Code and announcing our intention to bring forward legislation to make it a requirement for large businesses to include payment reporting in their annual reports. We will also be launching a public consultation which will consider additional legislative measures to hold large businesses to account on their payment performance and to support small businesses and the self-employed. We have also prioritised this statutory instrument, originally proposed by the previous Government, which was withdrawn due to the general election and which we have now reintroduced.

Prompt and fair payment has long been an issue in the construction sector, and particularly affects small businesses in the supply chain. This includes the practice of cash retentions, or firms deducting a percentage of the value of a payment being made to a supplier. Holding retention money is a long-established practice in construction contracts. While originally introduced as a form of insurance against contractor insolvency and defective work, it is controversial and can often lead to smaller contractors losing money. Construction contracts do not offer any protection against the loss of retention if the employer becomes insolvent. Furthermore, sums, which are often deducted at each tier of the supply chain, may be subject to late or partial return or even non-payment.

These regulations seek to increase transparency in relation to retention practices, payment and performance under construction contracts, thereby incentivising larger businesses to improve retention payment practices. This will provide small business suppliers with better information so that they can make informed decisions about who to trade with, negotiate fairer terms and challenge late retention payments.

Before I outline key elements of the statutory instrument, it may be helpful to explain the legal context. The Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 were introduced to bring transparency around the payment practices of large businesses. These regulations require businesses above certain size, turnover and balance sheet thresholds to publish information twice yearly on certain statistics, including their average payment times and the percentage of payments not made within the payment period, and information on their standard payment terms. The increased transparency has helped small businesses to make informed decisions before entering contracts with their large suppliers, while the extra scrutiny has helped to reduce payment times.

Build UK, a representative organisation for the construction industry, has benchmarked construction businesses on their payment performance since 2018. For its tier 1 contractors, improvements show the average time to pay an invoice has reduced from 45 days to 30 days; invoices paid within agreed terms have increased from 63% to 85%; and invoices paid within 60 days have increased from 82% to 96%.

Last April, the 2017 regulations were extended for a further seven years to 6 April 2031. Two new reporting metrics on the value of the invoices paid during the reporting period and the percentage of disputed invoices were also introduced to provide even more clarity regarding the payment performance of large businesses. Specific reporting on retentions held under construction contracts is not currently required. These regulations intend to rectify this omission.

This measure has been developed following extensive consultation with firms at all tiers of the supply chain, as well as with construction clients. A clear majority of the firms which responded to the public consultation in 2023—around three-quarters of the 120 respondents—favoured the introduction of a reporting requirement on retentions. Firms within the supply chain have told us they face challenges in understanding policies on the withholding of retentions and what the mechanisms are to secure their release. Many feel that they cannot ask for this information, in case it jeopardises their commercial relationships. This measure will bring greater transparency to the retention policies, practices and performance of larger businesses that are party to construction contracts.

I will now outline the key elements of this statutory instrument. It amends the 2017 regulations and introduces requirements for in-scope businesses to publish certain information twice per financial year about their retention practices, policies and performance, where retention clauses are included in construction contracts. The measure will apply only to large companies and limited liability partnerships which already have a duty to report on their payment practices and performance and which use 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 clauses. 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 its standard payment terms include retention clauses or whether they are used only in specific circumstances, which it would need to describe; whether there is a contract value under which no retention clause is included, and that value; whether a standard rate of retentions is applied, and that rate; whether there is a practice of using retention clauses no more onerous than those which it is subject to; and a description of the process for the release of retentions withheld.

Two metrics will also be required: the percentage ratio of the amount of retention withheld from the company by its clients as against which the company holds on its suppliers; and the percentage ratio of the amount of retention the company withheld from gross payments made to suppliers as against the gross amount paid to suppliers during the reporting period. These metrics will help provide smaller firms with better information about a large business’s retention payment practices. It will help illustrate the company’s approach to fair payment and a sustainable supply chain and incentivise larger businesses to improve retention payment practices.

In conclusion, this measure both addresses a clear request made by the industry and has been developed in conjunction with the industry. It is robust and proportionate and will provide small firms in the construction supply chain with useful 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 to retentions. I hope the Committee can see the benefits that these regulations provide and agrees with the introduction of this affirmative statutory instrument. I beg to move.

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[Lord Sharpe of Epsom (Con)]

My Lords, I join other noble Lords in welcoming the Minister to her place. The construction sector in the UK is not only one of the largest but one of the most vital industries underpinning our economy, as both noble Lords noted. In 2022, the sector achieved a turnover of £487 billion and employed over 3 million individuals, representing about 8% of the UK workforce. Its contributions are therefore fundamental in driving economic growth, fostering innovation and advancing development throughout the nation.

However, the sector is also characterised by considerable fragmentation. There are over 444,000 businesses engaged in a broad spectrum of work, ranging from contracting and product supply to associated professional services. The fragmentation is compounded by complex, multi-tiered supply chains, as major projects often involve 50 or more firms working collaboratively.

This brings us to the topic of retention sums, which are a long-standing practice in the construction sector. Retention—as it is still called for now—sums serve as a financial safeguard and ensure that work meets the required standards. Typically, half of the retention is released upon project completion while the remaining portion is withheld until the expiration of the defect’s liability period, proving additional assurance that all specifications are met. That, at least, is the dictionary definition of retention.

Given the current practices within the sector, we need to focus on the amendment introduced by these regulations. They all come into force on 1 March 2025 and apply to the financial year starting on or after 1 April 2025. The changes impose specific reporting requirements for qualifying companies and limited liability partnerships operating within the sector. The amendment extends existing reporting regulations and requires qualifying companies to disclose detailed information about their payment practices, policies and performance in relation to retention clauses in construction contracts.

Companies will be required to report on whether retention clauses are included in their contracts, the percentage of retention withheld and the procedures followed for releasing these sums. Additionally, businesses will be asked to disclose the contract value thresholds under which no retention clause applies and outline the standard rate of retention typically applied in their agreements. By 1 March 2025, qualifying businesses will be obliged to publicly report on their payment practices, specifically concerning retention clauses in construction contracts.

It is important that this amendment acknowledges the significant challenges caused by fragmentation within the construction sector, which of course affects businesses of all sizes. We understand that the aim of these regulations, as the Minister noted, is to enhance transparency by requiring businesses to report not only the inclusion of retention clauses but whether their retention practices align with industry standards or are more onerous than typical practices. Furthermore, companies will be required to provide clear descriptions of the processes that they follow to release retention sums, which is intended to ensure greater clarity and fairness for all parties involved. However, there are several important points on which further clarification is needed.

These amendments are said to provide increased transparency, fairness and clarity within the construction sector, but can the Government explain the mechanisms by which the regulations themselves will be enforced? How will compliance be monitored and what penalties will be applied to businesses found to be in breach of the new requirements? Additionally, while the new regulations seek to promote fairer payment practices, can the Government elaborate on how they plan to ensure that large companies are not able to exploit their market position, despite the new transparency measures? Will there be any safeguards in place to prevent larger firms imposing even more burdensome retention clauses on SMEs?

The regulations are presented as a solution to the ongoing issue of delayed payments, which have long caused a financial strain on SMEs, yet how will the Government measure the effectiveness of these changes? What evidence is there to suggest that requiring businesses to disclose their retention practices will have a significant impact on the cash-flow issues faced by smaller companies? As an aside, the noble Lord, Lord Fox, has raised an important point about how we will judge these companies in future, based on these particular metrics. These are not, of course, the only things by which one should judge a company or its potential to complete a project successfully and efficiently, so will there be some way of measuring that as well? If that has not been considered, it is something that should be.

While these measures are presented as steps towards promoting better cash-flow management and financial security for smaller businesses, we would urge the Government to further clarify how the regulations will be implemented and monitored to ensure that they achieve their intended outcomes. Will there be a review process to assess whether these regulations are having the desired effect on industry practices and the broader economy?

[Baroness Gustafsson (Lab)]

My Lords, I am grateful for the support for these regulations from across the Committee. I thank the noble Lords and noble Baronesses present for their constructive comments on this measure. Allow me to try to address each of the questions that they asked in order.

First, we heard from the noble Lord, Lord Aberdare. He asked a number of questions, the first of which was: have the previous regulations come into effect yet? The answer is yes; they came into effect and required a report as of 1 January 2025.

The noble Lord’s second question was about how the regulations will be enforced and how the accuracy of the data will be monitored. For that, the Department for Business and Trade will implement a more visible compliance and enforcement approach with non-compliant businesses going forward. Businesses that do not take action to meet their reporting obligations will be prosecuted.

We had a question, supported by the noble Baroness, Lady Neville-Rolfe, about why we would not just abolish retention payments altogether—that is, why are we taking this measure forward and not abolishing it in its entirety? The Government are aware of the impact that retentions have on the supply chain. We are very committed to going further to tackle poor payment practices: in September 2024, we announced our plans to consult on new legislative measures. Now, as part of that consultation, we intend to consult on measures that will address poor payment practices.

Moving on, I refer to the questions asked by the noble Lord, Lord Fox: does defining retention create a potential loophole for companies? Will they suddenly be redefined as completion bonuses? This is one of the arguments in favour of taking this sort of measured, proportionate approach, because we will be able to identify any unintended consequences of some of this legislation, but a key aspect of addressing the naming convention is that it is very clearly defined in a schedule not by what it is called but by the behaviours that it exhibits. Of course, we will monitor this and make sure that, if it requires an update, we will do so accordingly.

The noble Lord, Lord Sharpe, asked what the penalties are for failure to comply. The penalty for a breach of the 2017 regulations is an unlimited fine where a company fails to report or makes a false report.

Lastly, the noble Lord, Lord Fox, asked about sanctions, whistleblowing and the imbalance of power in the supply chain. I say in response that the imbalance of power in the construction supply chain is an ongoing challenge; that is widely understood and acknowledged. However, through the introduction of payment reporting measures for retentions and the enforcement of them, we will be able to create an incentive for firms to improve their payment practices in relation to retentions, as has happened following the introduction of the payment reporting regulations. As I talked about in my introduction to this instrument, we have seen the number of businesses paying within 60 days improve from 82% to 96%, so we should be encouraged that we are supporting correct behaviours with regard to policy.

This Government are committed to making sure that we tackle late and long payments. We want the UK to be the best place in the world for both large and small businesses to thrive. This work on retention payments aligns closely with the department’s wider policy on late payments and will strengthen the existing payment reporting regulations. It will provide for enhanced transparency in relation to the practice of withholding retentions—a practice that, as we have heard, is all too often unfair to small businesses and can, of course, be subject to abuse. It will also provide information to small firms and the construction supply chain about the policies and performance of firms that they are considering working for, enabling them to make better-informed decisions and to secure the payment of moneys due.

[Lord Fox (LD)]

Before the Minister sits down, I asked a very specific question around public procurement. I ask it again: if I am a public procurer and two bidders are more or less the same—or exactly the same—in their bid, but one of them has late payment, am I legally allowed to use late payment as the reason for not accepting that bid? Secondly, developing that question, if the late payer has the cheapest bid, can I also use late payment and retention payments as a reason for not awarding to that bid?

[Baroness Gustafsson (Lab)]

I apologise for not addressing that specifically. My understanding is that this information will help support a party in a commercial negotiation and will, ultimately, form part of its decision-making. As regards the technicality of whether one could legally use that as a way in or out of a contract, I will make sure that we write to the noble Lord on the specifics of that.

[Lord Fox (LD)]

It is really important because we are seeing, not necessarily under the Procurement Act but under the NHS, major legal tussles over the misapplication of the assumed rules of contract awards—not least in clinical waste disposal, where another six or seven health authorities are being taken to court. This is expensive; it will cost the public and the Exchequer. So it is important that we and public procurers understand from the outset whether this is window dressing or material to the procurement process.

[Baroness Gustafsson (Lab)]

I acknowledge that. I agree wholeheartedly with the noble Lord about the importance of getting that clarification; we will be sure to write to him in that regard.

Motion agreed.