Construction Industry: Cash Retentions

Lord Spellar Excerpts

Thursday 27th February 2020 Westminster Hall

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

I beg to move,

That this House has considered the use of cash retentions in the construction industry.

It is a pleasure to serve under your chairmanship, Mr McCabe. We all know the procedure for Westminster Hall—you know it better than I do, Mr McCabe. I move the motion and, at the end, everybody agrees that this House has considered the matter. In this case, however, the subject matter has been considered several times, yet for some reason the Government choose to do nothing about it, which becomes ever more frustrating. Small companies continue to suffer cash-flow issues because of late payment by retention or, even worse, non-payment, often because of insolvency of the larger company.

I intend to focus on the lack of Government action, but I should first explain what a cash retention is. An October 2017 report by the Department for Business, Energy and Industrial Strategy and Pye Tait Consulting defined a cash retention as

“a sum of money withheld from the payments of a construction sector project in order to mitigate the risk that such projects are not completed…to the required quality standard.”

Effectively, a retention is a cash bond withheld by the main contractor to cover any snagging defects in an agreed maintenance period of one to two years, and is intended as a lever to hold subcontractors to their legal contractual obligements to make good any defects in a set timeframe. The typical value is 5% of the works, which can create significant cash-flow issues.

At any one time, it is estimated that in England alone, between £3 billion and £6 billion of retention money is withheld. There is a logic to the origin of cash retentions, however, as an insurance policy or bond to ensure that work is completed to the desired standard. Of course, at one time, the only way to operate contracts was the use of cash, so there is a historical logic.

I fully understand, having worked in the construction industry, that retaining half of the retention money until the works are initially completed, and then releasing it, is a good incentive to ensure that work is done without leaving odds and ends. I also realise that during the snagging period, it can be hard to get a subcontractor back on site immediately to rectify snagging issues, because they have moved on to other projects and their resources are allocated elsewhere.

On the whole, however, the subcontractor will always return to remedy defects at their own cost, as per the contractual terms and conditions. As the retention money is seldom required to pay for snagging issues, it is due to be paid to the subcontractor at the end of a defect period. That is when subcontractors expect the money owed to them to be released.

History also shows us problems with cash-based retentions. Too often and for various reasons, the retentions are not released in a timely manner, or even worse, are not released at all. The most common reason for non-release is a company going into liquidation, but if the subbies fully comply with the terms and conditions in their contracts, why should their money not be released in a timely manner? Why, in the 21st century, are we dealing with unprotected cash retentions?

The worst recent high-level example of the effects of lost retentions was the collapse of Carillion in January 2018. Estimates of lost cash for companies are in the region of £250 million to £500 million. Just think how many small and medium-sized companies went bust as a consequence? How many training opportunities were lost because of the resulting cash-flow issues? How many subcontractors just decided that enough was enough, packed up and got out of the game?

[John Spellar (Warley) (Lab)]

The knock-on effect is even worse than that. The great long chains of subcontractors mean that a company that was not even involved on the site may be dependent on getting payment, for a completely different project, from the company in liquidation. The ripple effect, which basically undermines the ecosystem of our construction industry, has been considerable over many years.

[Alan Brown]

I fully agree with the right hon. Gentleman; that ripple effect can go all the way down to builders’ merchants and those who supply goods. It has a massive effect and we need the UK Government to do something about it.

I highlighted Carillion, and a further disparity is that for public sector contracts, for which tier 1 contractors are engaged, retention money is safe because the public sector will not go bust. Retention might cause tier 1 contractors some cash-flow issues, but their money is protected. In the case of Carillion, however, public sector clients will have retained Carillion’s retention money, which effectively included the subcontractors’ retention money. The subcontractors cannot get that money because they are legally creditors of Carillion. That shows an imbalance in the procurement process, because there is no regulation or guidance on how retention moneys are held or protected. If an employer enters into insolvency before the retention money is paid, the money is used to pay off creditors first—that is why changes are required.

In addition to the potential £500 million Carillion retention loss, the Specialist Engineering Contractors Group estimates that, in the last four years, £670 million of cash retentions has been lost to upstream insolvency, so for small and medium-sized enterprises, more than £1 billion has been lost in the system in that time. That highlights the need for Government action.

A micro-sized electrical business in the west of Scotland, which held a subcontract with Carillion, lost £40,000 in retention money when Carillion collapsed. Carillion’s client was the Ministry of Defence, which, ironically, did not hold retention money from Carillion. Carillion, however, took retention from the guys working for it. That subcontractor was lucky to survive, but could only do so by using reserves to plug the shortfall, cutting back on training, and cancelling plans to take on an apprentice. That single example shows the current imbalances in the procurement system and the impracticalities of using cash retentions.

The research paper “Retention in the Construction Industry”, published by BEIS and Pye Tait Consulting, found that 44% of the contractors surveyed had experience of retentions not being paid in the previous three years due to insolvency. In addition, 50% of contractors had their cash flow affected over the previous three years when their retentions were held, while they did not hold retention money themselves. Looking at the issue in the round, half of solvent contractors still suffer cash-flow issues because cash retentions are withheld. It should be noted that in more extreme cases, retention money is withheld for years. Why, in the face of such blatant evidence of those harmful effects, have the UK Government not taken action?

To illustrate the scale of the problem, the credit management company Creditsafe recently reported that 22 construction companies went bust in January 2020 alone. A further 158 firms were involved in varying stages of liquidation. Creditsafe predicts 4,000 construction insolvencies in 2020. That underlines the need for action.

Beyond the cash-flow issues, additional effects of withholding retentions include further insolvencies; job losses; cuts to training budgets and the inability to take on new apprentices; resources being wasted to chase up late payments, which leads to higher overheads for the company, an impact on productivity and unpaid hours for a non-chargeable activity; a possible inability for some companies to bid for other retention-based contracts or to expand because of cash-flow issues; and, if pressure bites, a desire to cut corners in other jobs to try to claw back money. Following the Grenfell tragedy, Dame Judith Hackitt’s “Building a Safer Future” report said

“Payment terms within contracts (for example, retentions) can drive poor behaviours, by putting financial strain into the supply chain. For example non-payment of invoices and consequent cash flow issues can cause subcontractors to substitute materials purely on price rather than value for money or suitability for purpose.”

There is of course a human element to this, because cash pressures bring personal stress. An industry survey before Christmas revealed that 90% of SME owners and senior managers were experiencing mental health issues, ranging from stress and anxiety to suicidal thoughts. Cash-flow issues clearly contribute to that stress.

[John Spellar]

Is there not an additional factor here? We have seen this: in any upsurge in demand, the construction industry has to go abroad for companies and skilled labour. The United Kingdom economy suffers a real loss in capacity, which impacts on private and public contracts, so the Government and in particular the Treasury should have a real interest in resolving this. Unfortunately, there does not seem to be much of a sense of urgency about solving it.

[Alan Brown]

Again, I agree with the right hon. Gentleman’s intervention, and I thank him for it. Apart from the skills issue in the UK, it is another reason why we use labour from abroad, as he said. Also, we have relied on EU labour, but now the UK Government are ending free movement, so that will cause another issue and certainly underlines why we need to resolve the matter.

If the late release of retentions is such an issue, why do the sub-contractors not do something about it, such as adjudication or arbitration? They are caught between a rock and a hard place—they need their money, but they are often frightened to rock the boat, perhaps losing a vital pipeline of work from the contractor they are in arbitration with. That was the case for a local contractor in my constituency who approached me, as the MP, on the issue of cash retentions.

The processes also cost money in terms of resource time, often valuable resource. Therefore, it is not as easy a process for sub-contractors to follow as Ministers have suggested in the past. According to the recently published Government response to a consultation, the average cost borne by firms in adjudication over the past five years is £28,000, which is cost-prohibitive for small companies.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Nadhim Zahawi)]

It is a pleasure to serve under your chairmanship, Mr McCabe. I thank the hon. Member for Kilmarnock and Loudoun (Alan Brown) for initiating this important debate. I also thank my hon. Friend the Member for Waveney (Peter Aldous) for his excellent contribution, and thank the right hon. Member for Warley (John Spellar) and my hon. Friend the Member for Kettering (Mr Hollobone) for their interventions.

The construction industry is vital to our future prosperity. Its turnover in 2018 was £413 billion, it accounts for 9% of the UK economy and it employs around 9% of the UK workforce, which is about 3.2 million people. The industry also builds and maintains our places of work, our schools, our hospitals, our economic infrastructure and, of course, our homes.

My hon. Friend the Member for Waveney asked me three questions. In answer to the first, which I will refer to as the Harrington question, the Government are committed to tackling the problems of late and unfair payment that burden businesses. That is why we have introduced a number of measures, including requiring large firms to report on their payment performance, the power to exclude firms that consistently pay late from Government contracts, and the prompt payment code.

Prompt and fair payment has long been a problem within the construction industry. Payment has traditionally cascaded down supply chains, as we have heard from a number of colleagues. As a result, smaller firms in the supply chain carry a disproportionate amount of project and payment risk, through late or non-payment; my hon. Friend the Member for Kettering gave Griffiths Air Conditioning and Electrical Contractors as an example of that.

Cash retention is an example of a payment practice vulnerable to both insolvency and abuse. Many construction contracts include provision for cash retention. Holding retention money is a long-established way of providing insurance against defects in an industry that is highly fragmented and operates on a project-by-project basis and in which defective work can be common. However, the practice does not offer protection to contractors against the loss of their retention due to upstream insolvency, as we have heard, including in the examples given by the right hon. Member for Warley. It can be subject to late, partial or non-payment for the supply chain. I reassure you, Mr McCabe, that Ministers acknowledge that there is a strong case to reform the practice of cash retentions, which is why we committed to review retention payments.

It may be helpful to outline the work that my Department has undertaken on this issue to date. We have consulted on the introduction of a retention deposit scheme, and produced an independent research paper on the issue, and we have looked at other solutions to the abuse of retentions. Following the consultation, we have worked with firms in the industry and with public and private sector clients to gather further information and to discuss possible solutions.

Further work has been undertaken to analyse the design, operation, costs and wider implications, including costs for the industry, of both a retention deposit scheme and a statutory ban on retentions. That work included ministerial roundtable meetings, which my hon. Friend the Member for Waveney mentioned, with key representatives from across the sector and from clients to tackle the abuse of retentions. While most people in the construction industry favour change, there is no consensus on the solution.

[John Spellar]

Quite frankly, has this issue not been researched and consulted on to death? As with most things in life, it will always be the case that there will not be unanimity. However, is it not the role of Government, and particularly that of Ministers, to make a decision, drive it through and make it happen? Without that we will keep going round in an endless cycle, while the industry, in all its various manifestations, is in a negative cycle of mutual abuse, which is dragging it down.

[Nadhim Zahawi]

The hon. Gentleman makes a powerful point. He is right that we have to make a decision, but it is complex and we do not want to create perverse incentives in a different direction. Consensus is necessary, as costs are driven by the extent to which industry adopts or resists change. If the industry does not adopt it, one sees a perverse incentive. It is clear that cash retentions in construction are a complex issue. I may be new to this job, but I spent many more years in business than I have spent being a Member of Parliament or a Minister. Sometimes the wrong decision can create a perverse incentive.

--- Later in debate ---

[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.

[John Spellar]

Let me try to help the Minister out of this—we would even be prepared to call it the Zahawi scheme if he wants to do it. Waiting for unanimity and overall consensus is a recipe for eternal inertia. The Government have a real interest, not just from the point of view of the economy as a whole but as a client, so let me ask him the straightforward question: when is he going to come to a conclusion and decide the way forward? I am not asking for an exact date, but how about a month?

[Nadhim Zahawi]

The temptation is great, but the issue is complex, as I have said—

[John Spellar]

It is not.

[Nadhim Zahawi]

I do not agree. I hope I have built a reputation over the past decade of being someone who is evidence led; it is important that we do that. My hon. Friend the Member for Kettering talked about the inability of small firms to pursue unpaid moneys because they do not have the time or the resources. The 2011 amendments to the Housing Grants, Construction and Regeneration Act 1996 were introduced to ensure fair and prompt payment through facilitating better payment, adjudication and arbitration processes, particularly for small businesses. I wanted to put that on record as well.

--- Later in debate ---

[Nadhim Zahawi]

I think it is unfair and wrong to say that—we are not kicking the matter into the long grass. I have repeated over and over again that we are committed to dealing with this issue.

[John Spellar]

When?

[Margaret Ferrier]

When?