Construction Sector: Cash Retentions

Lord Offord of Garvel Excerpts

Monday 11th December 2023 Lords Chamber

[Lord Aberdare]

To ask His Majesty’s Government what progress they are making in determining how to end the practice of cash retentions in the construction sector, and whether they plan to meet the 2025 target date for achieving zero retentions proposed by the Build UK Roadmap and endorsed by the Construction Leadership Council in 2019.

[The Parliamentary Under-Secretary of State, Department for Business and Trade and Scotland Office (Lord Offord of Garvel) (Con)]

I thank the noble Lord for his Question. The Government will add a requirement for reporting on retention payments to the Reporting on Payment Practices and Performance Regulations 2017. Work also continues with the Construction Leadership Council to reduce defects in construction and end the abuse of retentions. This includes supporting a pilot project with the Get It Right Initiative to reduce defects, as well as collaboration with the bodies responsible for construction contractual documentation, to discourage the withholding of retentions.

[Lord Aberdare (CB)]

My Lords, the announcement made last month, which was mentioned by the Minister, is a small step forward but it is too little, too late, and it does not go nearly far enough to end the bane of retentions, which cause huge damage to numerous small construction firms, and indeed to the sector as a whole. What further steps are the Government considering? Let me suggest two possibilities. First, they could ensure that the undesirability of retentions is included in the Construction Playbook, which sets out key policies and guidance on how public works projects and programmes are assessed, procured and delivered, but, rather shockingly, makes no mention of retentions. Or, secondly, they could put an effective system of enforcement in place for the measures he has just described when they are eventually implemented. If the Minister does not like those two ideas, I have at least half a dozen more that I could suggest to him.

[Lord Offord of Garvel (Con)]

I thank the noble Lord for that contribution. The Government understand well that the practice of cash retention can create problems in the supply chain, due to late and non-payment. We are committed to improving payment practices, but we have to work with the construction industry in this. The prompt payment and cash flow review report was just published on 22 November, and a key measure includes extending and amending the Reporting on Payment Practices and Performance Regulations, basically to increase transparency in this vital area to allow large businesses to provide data to the smaller companies to see how retention payments are working. We have to work with the construction sector in this.

The Construction Leadership Council has identified some solutions to mitigate cash retention payments. Our long-term aim is to remove the need for retentions altogether and, as I said, we are supporting the Get It Right Initiative and Cranfield University to reduce the rate of defects within the buildings commissioned across the public and private sector. The aim is to establish a quality metric as a viable alternative to the withholding of cash retentions as a form of insurance against defects. There is a lot going on. We are working with the industry and a lot of consideration has been given to this matter, but, ultimately, the construction industry itself needs to come to a consensus on how to improve this area.

[Lord Stunell (LD)]

My Lords, the Minister has just said that the industry needs to come to a consensus. What he is asking for is the greedy lions to sit down with the defenceless lambs and decide what menu is going to be eaten. The reality is that the upper-tier contractors have not just the whip hand but the bank balance. He will know that many of them have a business model that functions only because they retain retentions to which they are not legally entitled. Will he now introduce a simple measure to put the retention money that is levied into an escrow account so that it cannot be used and cannot incentivise upper-tier contractors to use it to fund their business model?

--- Later in debate ---

[Lord Offord of Garvel (Con)]

I thank the noble Lord for that question. Indeed, this has been the practice in the building industry for 150 years; it is the standard mechanism to ensure that work is done on time and to the right standard. There is about £4 billion held in cash retentions against a total turnover in the construction industry of about £430 million, so, guess what, that works out at 1%, which is roughly the margin in construction. Various plans have been put forward: there was a plan for insurance, but that did not work because of the Carillion failure and Grenfell Tower, and there have been various plans such as a retention deposit scheme in escrow. We have consulted the building industry, and there is a level of support for banning retentions and a level of support for not changing the system. The construction industry needs to come together and work out how to do this better.

[Lord Greenhalgh (Con)]

My Lords, does my noble friend the Minister accept that this is not a time to assume that the status quo is good enough? The noble Lord, Lord Stunell, is absolutely right: what we see is the big players squeezing the supply chain, and the result is often that the smaller players benefit not one penny and the big players do profit. I pay tribute to the noble Lord, Lord Aberdare, who, when I was in the hot seat, was pushing on cash retentions. We need to do something about this. It is very similar to when we rent a home: the landlord does not get his hands on the deposit; it is held, essentially, at a distance from the landlord who is renting the home. We need to change the system. Does my noble friend also agree that we need to improve the quality of construction? After all, that is something that needs to get better, and then we would not have to worry about retentions.

[Lord Offord of Garvel (Con)]

I thank my noble friend for that contribution. The Reporting on Payment Practices and Performance Regulations 2017 require the larger UK companies to report on a half-yearly basis on payment practices, policy and performance. The onus is increasing on them around transparency. The sector welcomes increasing reporting regulations. Build UK, the leading construction trade body, has been benchmarking construction companies on their payments since 2018, and improvements have been considerable. In 2018, the average time for paying invoices was 45 days, and it is now 32 days; the figure for invoices paid within agreed terms is now 82%, versus 61%, and for invoices paid within 60 days it is now 95% versus 82%. That shows that the construction industry can work positively in this area.

[Lord McNicol of West Kilbride (Lab)]

My Lords, similar to cash retention, late payments are a perennial problem, especially for SMEs and microbusinesses. Over the last 10 years, the Conservative party in government has launched no fewer than seven reviews into late payments. What recommendations have come from those reviews, and what benefits have SMEs seen from those seven reviews?

[Lord Offord of Garvel (Con)]

I thank the noble Lord for that question. As I indicated, the direction of travel has improved considerably, with the construction sector working positively to reduce the amount of late payments. Working with the contractors’ umbrella body, Actuate UK, and the new Get it Right initiative, I think we will see some improvements. We are trying to get defects and collection and completion certificates using processes developed by the Get it Right initiative, which are going to be data-based, to try to get a metric system which is more objective and less subjective and which can measure performance and indicate at an early stage whether it has been to the right standard. That will go a long way towards allowing earlier payment on retentions.

[Lord Watts (Lab)]

My Lords, could not the Government introduce legislation that separates any money that is being held and pay the interest to the contractors, rather than the person who is benefiting now?

[Lord Offord of Garvel (Con)]

As the noble Lord from the Cross Benches said, there are many suggestions as to how we go about doing this, and this is another one. On statutory bans on cash retentions, my department is fixated on trying to remove regulation from business, not increase it. We are looking to the industry to come forward with viable plans on how to make this work. Progress is being made and more can be done, but there is still not complete consensus on how to move this forward.

[Lord Londesborough (CB)]

My Lords, can the Minister explain why the Government are dragging their heels over the anti-enterprise practices of cash retentions and late payments, especially as SMEs in the construction sector are running the highest rate of insolvencies of any sector in this economy? Over the last three decades, the SME market share has dropped in new housebuilding from 40% to less than 10%, leaving the big housebuilders to increasingly dominate a sector that continually fails to meet demand. Why is there not more urgency?

[Lord Offord of Garvel (Con)]

I thank the noble Lord for that question. There is urgency, to the extent that we are consulting the industry, which has demonstrated that it can improve these terms. We have put the road map together and it is being worked on, but we need consensus in the industry to do that. I understand the concerns of SMEs, but transparency on data, as well as a metric system which shows more transparency and more independent KPIs on work being delivered, will go a long way, and that is what the road map envisages.