Construction Industry: Cash Retentions

Philip Hollobone Excerpts

Thursday 27th February 2020 Westminster Hall

[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.

[Mr Philip Hollobone (Kettering) (Con)]

I congratulate the hon. Gentleman on securing this debate and on his superb speech. Brian Griffiths of Griffiths Air Conditioning in Burton Latimer wrote to me on exactly that point:

“When monies are held for long periods (often years), SMEs simply do not have the time, resources or legal skills to chase or recover, and have to take it as loss.”

Is Mr Griffiths not spot on?

[Alan Brown]

He is absolutely spot on—I thank the hon. Gentleman for his intervention, which illustrates the point that I was making. For the record, I think it is the first time ever that he has said he is enjoying the speech I am making.

I stated that there is a historical logic to the origins of cash retentions, but there is no logic—and plenty of history—to UK Governments ignoring evidence and recommendations that time is up for the use of cash retentions. As long ago as 1964, the Banwell report, published through the Ministry of Public Building and Works, stated that:

“Where sensible methods of selecting contractors are used, the entire elimination of retention moneys could…be accomplished without any unreasonable risk”.

The report also suggested as an incentive that this

“might well lead to a reduction in tender prices.”

That possible carrot was not enough for the industry and the Government to take action.

A further 30 years down the line, in 1994, we had the Latham report. This was a joint construction industry and Government report that recommended that cash retentions should at least be protected in a trust account—recommendation 27 of the report. We have a tenancy deposit scheme to protect individuals in the private renting sector, and yet for some reason there has never been the will to do something with the deposits, in effect, in construction.

Why have delays continued for nearly another 30 years since the Latham report? In 2002, the Trade and Industry Committee looked at the matter of retentions, compiling the report, “The Use of Retentions in the UK Construction Industry”. It concluded that the use of retentions in public procurement should be phased out by 2007. That deadline came and went, so it is no surprise that in 2008 the Business and Enterprise Committee produced a report called “Construction matters”, which looked at cash retentions. That report noted that the system undermined team working, damaged the cash flow of small companies and impacted on training and innovation, and that it should be ended at least in all parts of the public sector. The theme is consistent, but we are still waiting for action.

Moving forward to 2016, the industry again hoped for action. In a Westminster Hall debate on 27 January, the then Business Minister Anna Soubry assured us that the matter would be addressed following a review by Andrew Wolstenholme, to be completed by the end of that year. Due to cynicism in the Chamber, she confirmed that

“this Government”

will not

“prevaricate in any way or seek to knock things into the long grass.”—[Official Report, 27 January 2016; Vol. 605, c. 149WH.]

The following month, when the Enterprise Bill was going through its stages in the Commons, the same Minister said of cash retentions:

“I think they are outdated and I do not think they are fair. They are particularly unfair to small businesses.”

Yet the Government still defeated amendments proposing to eliminate the use of cash retentions, including one that I tabled on Report. When I expressed concern in Committee about timescales, the Minister also stated that

“the hon. Gentleman can be assured that this Minister gives absolutely her word that this matter is not going to be kicked into any long grass. In fact it is very short grass, which has only just grown, because the review will be completed by March and then recommendations will go out to public consultation. If legislation is required as a result of that consultation, I will be happy to be the Minister to take that through.”––[Official Report, Enterprise Public Bill Committee, 9 February 2016; c. 47-48.]

We now know that the consultation process did indeed end up in the long grass. In 2017, I tried to take through a private Member’s Bill on the subject. Although the election killed that Bill, it is fair to say that the Government would have blocked it anyway, given that they did not back the Bill of the hon. Member for Waveney (Peter Aldous) in the last Parliament. We had both had considerable cross-party support for our Bills, so it was disappointing that neither made any progress.

The only action taken by the Government since were the BEIS consultations on “Retention payments in the construction industry” and on “2011 changes to Part 2 of the Housing Grants, Construction and Regeneration Act 1996”, undertaken between October 2017 and January 2018. To be fair, three meetings with industry and stakeholders were held, and those groups agreed that the status quo and doing nothing were no longer regarded as a viable option.

With the last consultation closing in January 2018, I have been getting frustrated—two years later, and no sign of anything happening. Then mysteriously, the day before this debate, the Government magically publish the responses to the consultation. Who would have thought it? Luckily for the thrust of my debate—I had already written some of this speech—that did not change what I planned to say, because we only have publication of the consultation responses. There is no hard evidence for what the Government will do next. Sadly, I fear for industry and the SMEs that the long grass is once again being prepared.

One of the just published documents on cash retentions states:

“Our aim is to work with the construction industry and its clients to achieve a consensus within the industry on how to resolve the problems associated with cash retentions. Several policy options are under consideration, a possible retention deposit scheme, and phasing out of retentions completely, and work continues to assess the viability and potential impact of these.”

It feels like we are going in circles, but will the Minister at least confirm that the status quo is no longer an option?

Why was there no acknowledgement in the consultation publication that a deposit retention scheme is the preferred option of respondents? Separately, the Scottish Government are consulting on retentions, including the possibility of introducing a deposit retention scheme. Their consultation closes on 25 March, but a key premise of the consultation is based on Pye Tait research, which states:

“The research particularly noted that retention money held in trust in a separate, ring-fenced account until it is either used to rectify defects or becomes due for payment or in some form of retention deposit scheme would meet almost all of the serious criticisms of the current retention system.”

That would allow a statutory solution to help prompt payments and deal with problems with cash flow. It has certainly given hope to SMEs that action will be taken in Scotland, and I urge the Scottish Government to follow through on that. Given their early adoption of project bank accounts, I expect them to be more receptive. It is fair to say that their consultation is a stage ahead of the UK Government’s.

The thing is that a working deposit retention scheme solution is at hand. Industry bodies and a major tier 1 contractor have been working collaboratively with academics, banking and financial experts, insurers and software developers to develop an IT platform as a digital solution to ring-fencing cash retentions. The key features in the proposed retention deposit clearing house scheme are that the aggregate of the retention moneys handed over to the client will held in a bank account and ring-fenced by a trust, and allocated to all supply chain firms as is relevant to their deductions. Also, firms will be able to use an app for online checks of the amount of their retentions held in the scheme. An insurance policy will be made available to the client to cover any shortfall in the scheme in case there is non-compliant work that is not rectified, because of insolvency, for example. The scheme will be regulated by the Financial Conduct Authority. The costs of administering the scheme are estimated at just £23 per £10,000 of main contract value, so cost is clearly not a barrier to introducing it.

It transpires from the responses that have just been published that the retention deposit scheme is the preferred option. Additionally, as I am sure the Minister is aware, the BEIS roundtable meeting of client and industry stakeholders in May 2019 voted for work to begin on the feasibility of a retention deposit scheme. I want therefore to ask the Minister what Government progress there has been to date, in relation to that work. What is the Department’s timetable for taking action on protecting cash retentions? Those are the key issues on which I am looking for an answer from the Minister—but by way of a conclusion there are some other questions I should like to put to him. Why did it take so long to publish the responses to the consultation? Does he agree that tier 1 contractors should not use subcontractor retentions for their own cashflow purposes? Will he definitively rule out the status quo? I have outlined Scottish Government recognition of the need for legislative measures on retentions, so what plans does BEIS have for legislative solutions? What is the Government position on retentions within their own projects? For example, will BEIS confirm that retentions will be removed from all Government-funded projects, as has been recommended for decades?

I genuinely hope that the Minister can give positive responses. Maybe he will be the one to cut through the long grass that cash retention has been hiding in for a long time. I assure him I would be happy to work with him to help him cut that grass, and help companies to get the money they deserve.

--- Later in debate ---

[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.

[Mr Hollobone]

My hon. Friend has a fan in Kettering. Mr Brian Griffiths, of Griffiths Air Conditioning and Electrical Contractors, which employs 30 people locally, has mentioned my hon. Friend to me in dispatches. Mr Griffiths is of the view, as am I, that the ready-made solution to the problem is my hon. Friend’s Bill, which the Government could simply introduce as a Government Bill. Not only is my hon. Friend outlining the problem extremely effectively, he is providing the Government with a ready-made solution.

[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?