Construction Industry: Cash Retentions

Margaret Ferrier Excerpts

Thursday 27th February 2020 Westminster Hall

[Margaret Ferrier (Rutherglen and Hamilton West) (SNP)]

It is a pleasure to serve under your chairmanship, Mr McCabe. I thank my hon. Friend the Member for Kilmarnock and Loudoun (Alan Brown) for securing this debate. It is fair to say that the practice of retentions remains a controversial issue. I hope that this debate has cast a little more light on the financial challenges facing the construction industry across the UK.

I would like to highlight a point made by my hon. Friend: some of these cash retentions have been withheld for many years, with an impact on productivity. The hon. Member for Kettering (Mr Hollobone), who is no longer in the Chamber, made an excellent intervention about small and medium enterprises not having the time, resources or legal skills to chase outstanding moneys. He recommended action—the best action would be a Bill in which the Government provide a solution.

The right hon. Member for Warley (John Spellar) spoke about the chain of subcontractors involved, and the monumental ripple effect through the industry. The hon. Member for Waveney (Peter Aldous), who is to be congratulated on introducing a ten-minute rule Bill in January 2018, made the point that the issue should have been dealt with in the 1990s, and has been dragging on all those years. He made the interesting point that some of the cash retentions have actually bolstered the working capital of groups that withhold the cash. The abuse of retentions prevents firms from investing and employing more staff. The way to go is definitely legislation.

Retention payments can skew the types of firms that bid for contracts. The practice of retentions has a significant impact on the entire supply chain, with small to medium-sized firms disproportionately affected. Many construction firms report that they will not even consider taking contracts that insist on retention payments, with significant implications on the types of firms that will bid for particular projects. Retentions also have a significant effect on cash flow and the supply chain. Although retentions will not be the only reason for late or non-payment for a project, anecdotal evidence suggests that cash retentions can cause or exacerbate cash-flow problems, meaning that companies with otherwise healthy balance sheets and considerable assets can be placed into administration or liquidation. That is especially true when companies are under pressure to win contracts by delivering high-quality work at low prices, leaving them little room for manoeuvre if projects overrun or incur substantial unforeseen additional costs.

My hon. Friend the Member for Kilmarnock and Loudoun referred to the collapse of Carillion. The impact of Carillion’s collapse on the construction industry and the wider public sector is well documented. However, it would be remiss of me not to highlight the fact that Carillion went into liquidation owing more than £1 billion to 30,000 suppliers, many of which were smaller firms that subsequently suffered major cash-flow problems because Carillion demanded up-front payment. Carillion’s collapse demonstrates how vulnerable smaller companies can be in the supply chain. It is the tip of the iceberg.

The UK Government’s own research found that smaller construction firms lose almost £1 million in fees per working day due to insolvency issues further up the supply chain. That is untenable. The economy is not well served if smaller firms can be held to ransom by larger firms, placing every other contractor in the supply chain in a precarious position.

Late and non-payment has a real human cost, too, which my hon. Friend mentioned. It was worrying to hear the statistics about SMEs, including the fact that cash retentions cause a lot of mental health problems. Construction News reported on 22 major administrations of construction firms in 2019. There are hundreds of job losses each time a firm closes its doors. As we saw with Carillion’s collapse, the precarious nature of the system is felt most acutely by employees. It is incumbent on MPs to do what we can to tackle the scourge of late payments.

We need to create a level playing field for different firms to bid for major construction projects, while ensuring that those commissioning construction projects can have confidence in the quality of the works that are carried out. They need to feel that they have appropriate guarantees and a way to sort out defects should anything go wrong with the project, but the withholding of cash, particularly from small firms, could be the difference between a business completing a contract and going under. We must offer firms alternative quality assurance models for construction works, such as retention bonds, performance bonds and parent company guarantees, all of which provide security through a third party and avoid the cash-flow issues and problems of late and non-payment that we have discussed.

The Scottish Government, as my hon. Friend mentioned, are well aware of the impact of retentions on the construction industry and are consulting firms across the sector on possible alternatives. I encourage all those with an interest to submit their views on the impact of retentions on their business by the deadline of 25 March. The Scottish Government’s proposal of a retention deposit scheme as an alternative mechanism to guarantee works has considerable merit, and I look forward to seeing at the end of the consultation period how construction firms responded to that proposal.

The UK Government have also consulted on the use of cash retentions. My hon. Friend mentioned that that consultation closed more than two years ago. It has taken the UK Government far too long to address the issue—although as he said, magically, the response was published yesterday, in advance of this debate. Why has it taken so long to publish the findings? What steps does the Minister intend to take to encourage the use of alternative quality assurance models for construction work? We want to move forward on reforms that give construction firms financial security while giving the public confidence in the quality and safety of building works.

--- Later in debate ---

[Nadhim Zahawi]

I refer the hon. Gentleman to the answer I gave earlier. We are absolutely committed, but it is a complex issue. My hon. Friend the Member for Waveney rightly asked the Government to agree that action should be taken. It is important to remind ourselves that we have now published the summary of responses to the consultation on the practice of cash retention. We will continue to work with him, with others and with industry on these issues and on policy options to address the problem. We are committed to addressing it.

My hon. Friend’s final question was about a pilot scheme. My officials have met with representatives of Pay2escrow on several occasions to discuss the proposal for a deposit retention scheme, and the meetings have been helpful in clarifying and understanding its work. We remain in dialogue with industry to try to build consensus on the future policy. As I said, given the complexity, it is important that we make the commitment when we think it is the right thing to do. I want colleagues to understand that we are committed to that process.

[Margaret Ferrier]

In the Government consultation, 82% of respondents thought that existing measures were ineffective in addressing the challenges of prompt release and security of retentions. The Minister mentioned an independent research paper. Can he tell us how long that research paper is going to take? Is this not, frankly, a matter of kicking this issue into the long grass once again?

[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?

[Nadhim Zahawi]

I will answer the hon. Member for Sefton Central (Bill Esterson), because he asked an important question—why will the Government not expand the remit for the Small Business Commissioner to include the construction industry? The honest truth is that the Government do not intend to extend the scope of the Small Business Commissioner’s activity to the construction industry. Section 4(5) of the Enterprise Act 2016 states that where,

“the complainant has a statutory right to refer the complaint for adjudication by a person other than a court or tribunal,”

that complaint is excluded from the commissioner’s complaint scheme.

The Government believe that that is the correct approach to considering the complexity of construction contract disputes, which tend to be incredibly technical, and we do not intend to extend the scope of the commissioner.

In answer to the question from the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier), the research was published during the consultation process. I hope that that sets her mind at rest.

[Nadhim Zahawi]

I think that my stating clearly and repeating over and over again that we are committed to dealing with this issue should give my hon. Friend the comfort he seeks that we are absolutely committed to dealing with this. Part of that process, as he can see, is the publication that we have made, and we will move forward to ensure we deal with it.

I will conclude by saying that there is no simple solution to the abuse of retention. Any changes would need to be implemented correctly and require consistent support from industry. I am clear that any solution must work for the industry and its clients, must be sustainable and must address all the issues and the need for both surety and fair payment.

Industry and clients need to work together to develop that alongside Government, as they are doing, and to define what the solution might be and how we create a process that gets us to that solution. I hope that that information offers some comfort to colleagues and some reassurance that the Government are committed—I say it one more time—to addressing the problems associated with the practice of cash retention.

[Margaret Ferrier]

The Minister has been very generous in giving way. He has said again that he is committed to tackling the issue, but do we have any idea of a timescale for this, or are we going to be back here in 2022 saying, “We were in Westminster Hall debating this issue”? Could we maybe get an idea of some sort of timescale?

[Nadhim Zahawi]

The hon. Lady is right to continue to push on this issue; I agree that the process has been far slower than I would have anticipated or the Government would have liked. That is partly due to the complexity of the issue and one should not—[Interruption.] The right hon. Member for Warley may laugh, but it is complex, because we do not want to intervene and create perverse incentives, and of course a wide range of interested parties are watching this space. I promise that we will continue to work with the construction sector and its clients to achieve a solution to this problem.