Construction (Retention Deposit Schemes)

Peter Aldous Excerpts

Tuesday 9th January 2018 Commons Chamber

[Peter Aldous (Waveney) (Con)]

I beg to move,

That leave be given to bring in a Bill to make provision about protecting retention deposits in connection with construction contracts; and for connected purposes.

Let me start by paying tribute to Sir Michael Latham, who died in November. He was a Member of this House for 18 years, from 1974. In 1994, he produced a report, commissioned by the Government and the construction industry, called “Constructing the Team”. The report had a significant impact on the industry and led to the passing of part 2 of the Housing Grants, Construction and Regeneration Act 1996, which is commonly referred to as the Construction Act. Unfortunately, one of Sir Michael’s recommendations remains outstanding, and has not been implemented. It relates to cash retentions in a secure trust fund. Two decades on, we should be rectifying that omission.

On 24 October, the Department for Business, Energy and Industrial Strategy began a consultation, which ends on 18 January, on the practice of cash retentions in the construction industry. That followed an independent and long-awaited review which confirmed that retentions are a critical issue that affect the viability and productivity of small and medium-sized enterprises in the construction supply chain. They also increase the cost of construction. Across the industry, there is very strong support for putting a solution in place now, with specialist engineering contractors recommending that a statutory ring fence of retentions is the best option.

I will now outline what the problem is. Retentions are deductions—usually 5%, but sometimes 10%—from moneys due to a construction business. Ostensibly, they are held as security in case a firm fails to return to rectify defects. However, 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 of upwards of three years, and in one case 12 years. According to Government figures, almost £8 billion of cash retentions has remained unpaid over the last three years. Most of that cash has been provided by SMEs. No other industry puts so much cash at risk and places such a burden on small businesses.

Research carried out by the Building Engineering Services Association illustrates the extent of the problem. Some 44% of contractors have suffered non-payment due to upstream insolvency in the last three years. Almost half of businesses that have had retentions held in the last three years have experienced non-payment due to upstream insolvency, with the average amount lost per contract being £79,900.

Tier 1 contractors suffer average delays of three months. There are delays of seven months for tier 2 contractors and delays of over nine months for tier 3 contractors. It seems that the smaller the business is, the harder it is hit. Research shows that retentions make construction more expensive than working without retentions. Most main contractors do not have automated release payments, and the average cost of taking legal action over the last three years was £16,300 per contract.

The abuse of retentions has a negative knock-on domino effect that cascades through the construction industry. It restricts investment in new equipment and facilities. It prevents firms from taking on more work, and it discourages them from employing more people and investing in apprenticeships. The Electrical Contractors Association comments:

“smaller businesses can’t invest enough in skills or equipment, or help to improve industry productivity, if their cash flow is restricted in this way.”

That is the problem; I shall now move on to the solution.

The previous failed attempts to resolve the problem confirm that the only solution is legislation that secures moneys so that they will be available to be returned, subject to the other party having right of recourse to the moneys. A solution would be along the lines of the statutory requirement in section 215 of the Housing Act 2004 under which deposits taken from shorthold tenancies must be placed in a Government-approved scheme. A similar scheme would work for retentions. Ring-fencing the moneys in such a way would mean that they would be secure and available to be released on time, rather than subject to the current wait of two or more years. That would help to increase the velocity of cash in the system, and if moneys were secured in this way, banks would be able to lend to firms on the back of such security.

It is appropriate that we look at the situation in other countries. We are now very much out of step with what happens elsewhere, where there is legislation to ring-fence cash retentions and/or to provide security for construction payments in general. In Canada and the United States, a system of charges can be placed on a building or structure by a firm that has not received its payment. Australia and New Zealand have legislated to ring-fence moneys. France has a statutory framework that requires bank guarantees to be used as security for payment in the construction industries.

Doubters might ask whether there is a cost associated with ring-fencing, but that should not be a problem. The tenancy deposit scheme to which I referred is self-funded through the interest earned on deposits, with any profit made transferred to a charity that provides training in the sector. Such a scheme would be a win-win for construction, as it would be a source of much-needed funds for training.

This Bill is relatively straightforward. It would amend the Construction Act to require the Secretary of State to introduce regulations to protect retentions. It would bring closure to the many efforts made in the past to address the problem. In doing so, it would transform the prospects of SMEs, which make up 99% of firms in the UK construction industry.

A key element of the Government’s industrial strategy is to create the right conditions for businesses to grow and to encourage them to invest over the longer term to improve productivity. The Bill would help to secure that objective.

This is not the first time that the matter has been raised in this House. When the then Trade and Industry Committee carried out an inquiry more than 15 years ago, it concluded that the practice of cash retentions was outdated and that abuse of the system was so widespread that the Government were invited to phase out retentions as soon as possible. Sadly, they did not do so.

Four years ago, a cross-party parliamentary inquiry into late payments and their impact on SMEs recommended that the Government should introduce a retentions money Bill, with money retained by a customer from a supplier to be held in a trust account. That inquiry was chaired by the hon. Member for Oldham East and Saddleworth (Debbie Abrahams). On 26 January 2016, the hon. Member for Upper Bann (David Simpson), a supporter of the Bill, initiated a Westminster Hall debate on the subject. As he will recall, the collapse of the Patton Group in Northern Ireland left £10 million outstanding by way of retention moneys. SMEs in Northern Ireland never saw that money again.

On 26 April last year, the hon. Member for Kilmarnock and Loudoun (Alan Brown) introduced the Construction Industry (Protection of Cash Retentions) Bill, also under the ten-minute rule. Unfortunately, the general election curtailed progress on that Bill. The hon. Gentleman is also a supporter of this Bill.

The Bill has strong support from the construction industry. At the last count, it was backed by 30 trade associations. Time, and the embarrassment of missing someone out, means I will not list them.

While the current consultation is welcome, there has been too much talking for too long. This matter must be addressed as soon as possible. If one of the larger construction companies were to fail, the consequences for SMEs and their supply chains could be disastrous. They could lose all their retentions, adding to the £220 million that is already lost annually. The Bill would help to avert such a calamity.

This is a critical time for the construction industry. We need to be building record numbers of homes. As Brexit approaches, the construction industry must be able to operate in top gear. This restrictive and grossly unfair practice acts as a brake on activity in the sector. If we remove it, we can unleash investment in jobs, apprenticeships and technical innovation.

Sir Michael Latham recognised the need for a partnership approach, with industry and the Government working together. It will be a fitting tribute to his work if, 22 years on, we could finally deliver the final piece in the jigsaw of his recommendations in “Constructing the Team”.

Question put and agreed to.

Ordered,

That Peter Aldous, Sir Henry Bellingham, Alan Brown, Kevin Hollinrake, Eddie Hughes, Mr David Jones, Caroline Lucas, Mr Barry Sheerman, David Simpson, Sir Mike Penning, Dr Dan Poulter and Mr Edward Vaizey present the Bill.

Peter Aldous accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 27 April, and to be printed (Bill 148).