Construction Industry: Retention Payments

Lord Callanan Excerpts

Thursday 14th January 2021 Lords Chamber

[Lord Aberdare]

To ask Her Majesty’s Government what steps they have taken since the publication on 26 February 2020 of the responses to their consultation on retention payments in the construction industry.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)]

The Government, in conjunction with the Construction Leadership Council, are working to develop a sustainable strategy on retentions for the whole sector. During the current pandemic we have also provided guidance to the industry on responsible and fair contractual behaviour, including in relation to retentions. We are committed to improving payment practices and working with the construction industry to take this important matter forward.

[Lord Aberdare (CB)]

My Lords, it is three years since the Government’s consultation on retentions ended and, as we have been reminded today, three years since the collapse of Carillion, which led to small construction firms losing hundreds of millions of pounds in retentions. Retentions limit their ability to invest, grow, train staff, take on apprentices and, all too often, survive. The actions mentioned by the Minister are better than nothing but do not go nearly far enough. I have two questions. What are the Government doing now to prevent small construction firms, already under pressure from the pandemic, being crippled because funds properly belonging to them are being used by larger clients to prop up their own cash flows? When will the Government introduce the legislation reform that is recognised as the only way of bringing proper ongoing relief to these small firms?

[Lord Callanan (Con)]

I know that the noble Lord has been active for many years on this important issue. This has been a slower process than we might have liked, in part due to the complexity of the issues associated with the practice of cash retentions and the wide range of interested parties. While most in the construction industry favour or could accept change, unfortunately no consensus on a preferred solution has emerged from industry to date.

[Lord McColl of Dulwich (Con) [V]]

My Lords, what happened to the suggestion in the Murray review of 2017 that retention payments for subcontractors and vendors on major projects should be held in a designated trust account? As far as retention payments are concerned, will it help to develop the system of financial rewards for those who settle accounts earlier?

[Lord Callanan (Con)]

That is indeed one of the policy suggestions we are looking at, but given the complexity of the policy issues, it is premature to commit to the introduction of a retention deposit scheme. We will continue to seek consensus and work with industry to find a way forward.

[Baroness Wheatcroft (CB) [V]]

Can the Minister estimate the construction payments retained by the public sector, specifying the extent of the payments to Carillion retained by the Government? Given that there were only 55 responses to a consultation that concluded in February 2018, why did it take two years to publish those findings on what he terms an “important matter”?

[Lord Callanan (Con)]

I do not have figures for the public sector, but not withholding retentions is government policy—although I am aware that some departments and agencies do. Unfortunately, we do not have the power to instruct local authorities in this matter. If there are any figures available, I will of course let her have them.

[Lord Stevenson of Balmacara (Lab) [V]]

My Lords, I declare an interest as my wife is a construction lawyer. This issue was raised regularly by the late Lord O’Neill of Clackmannan, and I am sure I speak for the whole House when I say that we miss him. The consultation referred to by the noble Lord, Lord Aberdare, is highly critical of current practice. It also stresses that the pandemic raises major insolvency worries. Why do the Government not use their Covid-19 emergency powers either to introduce an RDS or to abolish retention payments and try out this new policy?

[Lord Callanan (Con)]

I join with the noble Lord in paying tribute to the work of the late Lord O’Neill: as the president of the Specialist Engineering Contractors’ Group, he was active on this issue for many years and instigated an inquiry on it in 2002. As I have said, given the complexity of the policy issues, there remains no consensus on the way forward, but we will continue to examine the issues, to work with industry and to seek a solution to this problem.

[Lord German (LD)]

The last two paragraphs of the Government’s responses paper lay out only two policy options: the retention deposit scheme or phasing out retentions completely. May I follow the noble Lord, Lord Aberdare, in pressing the Minister? He already has the responses and knows the two options before him. Can he tell us when the legislation will come forward to make this happen? It is much needed and will avoid late payments, non-payments and insolvencies.

[Lord Callanan (Con)]

Those are two of the alternatives that have been suggested as a policy response. Changes in this area would require primary legislation, and there is always pressure on the Government’s legislative timetable. We think that working with the industry to seek a consensus is a good way forward, but there is not yet a consensus: some notable companies are against a deposit retention scheme or the other policy option the noble Lord mentioned.

[Baroness Donaghy (Lab) [V]]

I would like to thank the Minister and the noble Lord, Lord Stevenson, for referring to Lord O’Neill. We miss him and I am sure the industry misses him.

This has been going on for decades. The large construction companies that owe money to subcontractors use it as working capital. Having a retention fund would stabilise the industry and prevent job losses and redundancies. What priority will the Government give to taking long overdue action?

[Lord Callanan (Con)]

The noble Baroness is right: this has been going on for a long time and under many different Governments. The complexity of the issues is one reason why no action has been taken so far. As I said, we are committed to working with industry to find a consensus, and we are working with the Construction Leadership Council. We are committed to addressing the related issue of late payments, and we will try to find a consensus on a way forward.

[Lord Kirkhope of Harrogate (Con) [V]]

My Lords, although the consultation process was quite wide, only seven individuals contributed. Does my noble friend agree that, particularly at this time, any arbitrary or unfair retention of moneys due to individual tradesmen and women—whose skills we must retain in the construction industry—exerts a disproportionate pressure on them and the continuation of their specialist services? Is it not time to alleviate the pressures on these people in particular?

[Lord Callanan (Con)]

I agree with my noble friend. We understand that the practice of cash retention can create problems for individuals and businesses in the construction supply chain, due to late payment or non-payment. We are committed to improving payment practices and working with the construction industry to try to take this matter forward.

[Baroness Jones of Moulsecoomb (GP)]

My Lords, I understand the attraction of looking for consensus among all the players, but it is obvious that the current system is unjust and has a particular impact on smaller businesses, which need the money desperately. Why do the Government not just take a lead and govern as they should?

[Lord Callanan (Con)]

At the risk of repeating myself, it would require primary legislation and there is pressure on the legislative timetable. There are a number of different options to take this forward. We are committed to ending the practice of late payment and we will work with industry to try to find a solution to this problem.

[Lord Stunell (LD) [V]]

The Minister’s answers so far have been deeply disappointing. Of course there is no consensus within the industry, because there are winners and losers. The winners of the present system are the big companies; the losers are everybody else. The current retention system undermines trust and confidence, destroys capacity and deters long-term investment in training and skills. Having heard noble Lords today, will the Minister agree to come back to your Lordships’ House before the end of this Session and say exactly how and when the Government plan to mitigate the damage caused by the current system? He cannot sit on his hands and say he is waiting for other people to come to their decisions first.

[Lord Callanan (Con)]

We are not waiting for other people to come to their decisions. We are actively working with the Construction Leadership Council to try to find a solution to this problem.

[Lord Bourne of Aberystwyth (Con) [V]]

My Lords, this is clearly a serious problem. In the meantime, the building industry has committed to achieving zero cash retention by 2025. Can the Minister inform us how that process is being pursued? What success are we having?

[Lord Callanan (Con)]

A lot of discussions are taking place between the Government, the Construction Leadership Council and different parts of the industry; we are actively exploring possible solutions and are committed to improving payment practices and working with the construction industry to take this forward. Of course, any solution has to work for the industry and its clients, and it has to be sustainable, addressing all of the issues: the need for surety and fair, prompt payment. As I said earlier, several policy options are being considered, including a possible retention deposit scheme and, of course, phasing out retentions completely. During the current pandemic, the Government, in conjunction with the Construction Leadership Council, have provided guidance to the industry on responsible and fair contractual behaviour, which, of course, includes retentions.

[The Deputy Speaker (The Earl of Kinnoull) (Non-Afl)]

My Lords, all supplementary questions have now been asked, and we move to the fourth Oral Question.