Carillion’s collapse and the retentions scandal raise some basic questions about how our industry is valued and how we value each other.
The press has been deluged with financial figures since Carillion went into liquidation.
What is worse: the fact it was holding back £800m of subcontractors’ money, or that the accountants managing the liquidation process are charging around £10m a month?
The figures are so huge that you start to lose sight of what they actually mean: £10.5bn of potential working capital is locked up in retentions every year, and SMEs lost £700m over the past three years through unpaid retentions – roughly £1m per working day.
These millions have been extracted or withheld from our industry, leaving no legacy of any value to the country or our society. How many schools, hospitals and other important facilities could have been built with this money? How many jobs created and apprentices trained? What value has the government and taxpayer derived?
However, it is the smallest figure that has the greatest resonance: the average UK contractor loses £27,500 in retentions each year. It may be small in isolation, but this money represents absolutely crucial working capital and many SMEs are now facing insolvency for want of comparatively tiny sums.
Case in point
Take a company such as Vaughan Engineering, which says it was owed £600,000 by Carillion – and was contracted to complete a further £1.1m in planned projects.
According to the accountants at PwC, none of the debts unpaid when Carillion went under will be honoured. Yet the contractor managed to rush through payments of £6.4m in fees to a suite of financial ‘experts’ in the days before it was liquidated.
“They are not marching on Whitehall with pitchforks and flaming torches – this is not revolution”
Vaughan’s operations in England and Scotland are now in administration and 160 people have lost their jobs.
None of this means retentions should be abolished – not yet anyway. The investigation into the Grenfell Tower fire shows that the industry has some way to go before it can claim to deliver defect-free projects.
But it is the way retentions are used that needs to change.
Dreamed up in the Victorian era to protect housebuilding clients from sub-standard work and contractor insolvency, they are now regularly abused as a thinly disguised way to supplement working capital.
The Aldous Bill, which seeks to bring about reform of the retentions system, is due to have its second reading in parliament on Friday. It does not seek an end to retentions – although that must be the industry’s ultimate aim – but rather to ensure retention money is protected in ringfenced deposit accounts. This should ensure that, if and when another Carillion happens, it does not take other perfectly sound businesses down with it.
More than 75 trade bodies representing 350,000 businesses and more than 100 MPs are putting their weight behind this bill. This unprecedented coalition for change is presenting a petition on late payment to 10 Downing Street this week led by Peter Aldous MP in the hope that this might increase the political urgency behind the proposals.
They are not marching on Whitehall with pitchforks and flaming torches – this is not revolution. It is simply a call for justice and for a fairer method of protecting SMEs’ cash, while continuing to provide clients with the reassurance they need that project defects will be addressed.
All of these businesses – with the employment and tax-paying potential they represent – are simply asking the government to legislate so that retentions are used in the way they were intended.
The industry is not ducking its responsibilities; we want to deliver value for the country through a world-class built environment, but achieving this gets harder year after year as retentions starve us of crucial working capital.
David Frise is chief executive of the Building Engineering Services Association (BESA)