Construction Industry: Cash Retentions

Bill Esterson Excerpts

Thursday 27th February 2020 Westminster Hall

[Bill Esterson (Sefton Central) (Lab)]

I congratulate the hon. Member for Kilmarnock and Loudoun (Alan Brown) on securing yet another debate on this topic.

“Stop, thief!” That was my reaction when I learned that £573 million has been lost by SMEs in the construction industry in the two and a bit—quite a bit more than a bit—years since October 2017, when the Government published a report showing that £229 million a year is lost as a result of the application of retentions, which has been described so well by Members across the Chamber.

A crime has been committed. In fact, a series of crimes has been committed over many years. This is a crime in which there is an imbalance of justice between large and small: the big firm is allowed to exploit the small firm with impunity and continue to get away with it. The perpetrators are a relatively small number of very large organisations. The victims—in any crime there are victims, and we should take their side—are SMEs in the construction sector, and self-employed contractors, who often rely on SMEs for work. Retentions are applied unfairly and disproportionately in the supply chain. It is a crime that that has been allowed to continue.

Let us see some action to stop the thief. Let us end this criminal activity and imbalance. Let us ensure there is a level playing field in the construction industry by taking the kind of action that the hon. Members for Waveney (Peter Aldous) and for Kilmarnock and Loudoun, and many of the rest of us, have sought for some time. It is time the Government stood up for the little person rather than siding with the large corporates. Frankly, the lifestyles of a small number of people running large organisations are funded on the backs of hard-working owners and workers in small businesses in the construction sector. Why on earth is that allowed?

I am afraid that the idea in one of the consultation responses that we should not worry about insolvency because there is a buoyant market is at best complacent and at worst downright disingenuous. We have only to look at what happened with Carillion—I think it was actually £2 billion in late payments that was lost by 30,000 businesses—and at the examples given to us by the Federation of Master Builders. K&M Decorating lost £230,000 in retentions alone. A number of the federation’s members that were in supply chains with Carillion went into liquidation as a result of unpaid retentions. We must not be complacent. We cannot afford to take the attitude that insolvency is not the problem that it really can be. Insolvency often happens, and even when it does not, chasing retentions—certainly the final element of them—is a huge problem for many businesses, some of which give up.

Let us remember that the amount of retentions we are talking about is often the margin for smaller firms in construction contracts. If firms are unable to collect those retentions, their financial viability is often threatened.

[John Spellar]

Does not that mean that many big contractors are in a mutually destructive relationship? If some of their subcontractors—or even their sub-subcontractors—go bust, they have to bring in new firms, delaying and putting at risk their projects. Somebody—actually, it has to be the Government—has to break that mutually destructive cycle.

[Bill Esterson]

I agree with my right hon. Friend, and that goes back to what the hon. Member for Waveney said about the big contractors beginning to wake up. They cannot carry on as they are because by continuing this disruptive practice, they will be undermined. When the large firms start to challenge the very behaviours from which they profit, we start to realise that perhaps those behaviours are coming to an end. We live in hope that that is part of the answer.

Some of the consultation responses said, “Everything’s fine, leave it alone”, but that is clearly a minority view. We often see the attempt to get small firms to apply for prompt payment in return for a discount, a quite disgraceful business practice that happens not just in retentions but across the board—and not just in the construction industry. Again, the Government should be challenging and ending that. It goes back to the point about tight margins.

I take exception with how some of the responses were reported by the Government in the summary of consultation responses, because it was quite hard to tell the difference between the responses from large firms and those from small firms—the perpetrators and the victims. We could work it out in the end, but we had to really look for it. Perhaps the Minister will speak to that point.

A constituency firm of mine called WT Jenkins, which does highway lighting, showed me its files on the shelf in the office. Its typical retentions, when I spoke to it about five years ago, were between 5% and 10% of contract price. That is in the public sector. There are problems in the public sector and in the private sector, in house building in particular. The firm was waiting between two and five years; the hon. Member for Waveney mentioned three years in his speech. It is an absurd way to carry on.

Other Members may have seen a letter sent to the Secretary of State from R Durtnell and Sons Ltd, building contractors who had been going for 430 years. I hope the Minister has had sight of it. The firm’s three-page letter describes the refusal to pay, the exaggeration of claims of defects by the main contractors and an exploitative model. It made clear in the letter that it paid its suppliers and its retention liabilities on time, yet it had to suffer having retentions withheld against it for many months, if not years, in wholly unacceptable ways. Other hon. Members spelled that out well in their examples.

Like the hon. Member for Kilmarnock and Loudoun, I thought, “Great! We have had a Government response to the consultation. Fantastic news”—and then I read it. I thought that I could have told the Government every single one of the comments, because they have all been made in this House and to us individually by businesses and business organisations over the years. It has taken two years to get to the point of the response.

My right hon. Friend the Member for Warley (John Spellar) rightly mentioned the lack of urgency. We have had roundtables, with the last one, as we heard, happening in May last year. Why are we getting only a summary of responses? Why have we not had an action plan? A paragraph saying:

“Several policy options are under consideration”,

simply does not cut it. That is not good enough. It will not stop the crime of retentions. We need action and we need it fast.

In the consultation, the phrase “the principle is sound” was used when referring to the concept of retentions. Not, I am afraid, in the way it is applied. It is not doing anybody any favours, certainly not those at the sharp end. As we have discussed previously, it is increasingly affecting the industry as a whole and those at the top as well. We can see some signs of improvement in the public sector with project bank accounts. Highways England is spending a £20 billion on work through project bank accounts and the devolved nations are taking active steps along similar lines.

The Government have a great tool in procurement. They can insist that those who spend money with the Government apply productive, responsible business behaviours through their supply chains. Why are they not doing that already? Perhaps they are considering that in their response, and perhaps the Minister will say that they will take such an approach. The fact that the tenancy deposit scheme in the private rented sector is effective and works well shows what kind of model can be put forward. The hon. Member for Waveney’s ten-minute rule Bill gives the Government a blueprint for what could be applied.

The hon. Member for Kilmarnock and Loudoun mentioned Dame Judith Hackitt’s comments. A poor quality of work is one of the system’s consequences, with substitutions for poor materials made because of the impact of non-payment in the retention system on cash flow and profits. It is a very real problem, and anybody who looks at the poor quality of new build housing can see exactly what is happening. I have seen it at a 300-home development in my constituency next to the new Maghull North station, with shoddy work and the application of retentions while the developer, Persimmon, makes vast profits and pays significant bonuses to its directors. It is not good enough and it has to change.

The Housing Grants, Construction and Regeneration Act 1996 is quoted by a number of respondents to the Government consultation. Pay-when-paid is not allowed, but it continues and we need further action, intervention and support to deal with that problem. Is it not about time that the Small Business Commissioner and their office had full responsibility for looking into this issue and were given the resources needed to address retentions in construction in both the private sector and Government procurement supply chains?

This is an incredibly important issue for the construction industry and the wider economy. When will we get the full Government response? The Government say that they will work with industry. The policy options mentioned in the report are

“a possible retention deposit scheme, and phasing out of retentions completely, and work continues to assess the viability and potential impact of these.”

Why has it taken so long? When will it come forward? It should have been with us today had anything been brought in front of us for the debate. The retention deposit scheme has clear support in the consultation, as does a phasing out of retentions altogether. Everyone expects the Minister to give some answers on those ideas at this stage.

A level playing field is needed. Suppliers have to be treated fairly. There can be no more Carillions. There must be an end to the crime of retention and to the abuse, as well as proper support for victims and justice for the construction SMEs and self-employed contractors. In whose interest is it to continue as we are? It is certainly not in the interest of the small businesses and the self-employed contractors, and it will not be in the interest of the large firms for much longer. The Government can do something about this issue. They have the evidence to act and they must get on with it.

--- Later in debate ---

[Nadhim Zahawi]

I opened by saying that the Government are committed to tackling the problem of late and unfair payments, so I hope that answers the question whether we are going to do something about the issue.

To respond to other points that were raised, the hon. Member for Kilmarnock and Loudoun and my brilliant hon. Friend the Member for Waveney both mentioned their private Members’ Bills. It is important that any action we take is robust, proportionate and evidence based, which is where we are at the moment. Several policy options are under consideration, including the retention deposit scheme. It would be premature to commit to anything at this stage while several policy options are under consideration.

[Bill Esterson]

The Minister is right to look for evidence. We have a tenancy deposit scheme that works. We have evidence from New Zealand, Canada, Australia, France and New Mexico that such a scheme is possible in construction. The evidence of best practice from around the world is in front of him. The evidence is also there from the construction industry in this country that it is desirable and needed. This has gone on for far too long; can the Government just get on with it?

[Nadhim Zahawi]

I am grateful to the hon. Gentleman for his encouragement. The hon. Member for Kilmarnock and Loudoun talked about a clear majority supporting the retention deposit scheme. I take issue with that, and not as a party political matter. There is no clear majority supporting any solution at the moment. It is right for the Government to begin to distil opinions and come to a view.

The hon. Member for Kilmarnock and Loudoun also mentioned that significant parts of the industry have called for the scheme and asked why the Government will not legislate for it. Given the evident complexity of the policy issues, as we have discussed, it would be premature to commit to introduce a retention deposit scheme. In addition, costs are driven by what the industry wants to adopt and what it wants to resist. Unfortunately, the lack of consensus to date means that a preferred solution has not yet emerged. We will continue to work with stakeholders and I would like to think that we can get to a place where we have that consensus.