Retentions are back in the spotlight following Carillion’s collapse, yet the industry is divided on how to take action. Why are retentions being abused and how should they be tackled?
Over the last 200 years, the use of retentions has become ingrained in how the industry operates.
First used in the 1800s, clients would hold back a slice of construction contracts to guarantee there would be funds available to complete a project if a contractor went under. Though typically thought of as a practice employed by larger companies against smaller firms, it has in fact spread to every last corner of the supply chain from top to bottom.
The single biggest grievance levelled against the practice is that smaller suppliers are the most likely to suffer. Typically, larger contractors take retention monies from their suppliers and attempt to hold onto as much as they can to shore up both cashflow and thin margins on projects. A similar accusation is levelled at clients using contractors’ cash, particularly in the private sector.
In 1994, this practice of late, partial or non-payment of retentions was raised in Sir Michael Latham’s Constructing the Team report. Sir Michael recommended that retentions (when a certain amount is deducted from contracts to cover any defects discovered post-handover) should be replaced with trust accounts so money is not held and controlled by the client.
The Construction Act 1996 followed. But Sir Michael’s recommendations on retentions did not feature.
The trade and industry select committee conducted an inquiry into retentions nearly a decade later in 2003. It recommended that retentions be banned on public sector contracts. However, a ban never materialised.
Five years on from that, its successor the business and enterprise select committee published a report, Construction Matters, in 2008. The same recommendations about abolishing retentions were outlined – but again, the government did not act.
As a result, the practice continues to this day.
But following the nationwide coverage of Carillion’s collapse, this industry’s business model has come under high-profile scrutiny. The government is now under greater pressure to confront the issue, and political interest has swelled.
In January this year, Conservative MP for Waveney Peter Aldous presented a bill to parliament that would make it unlawful for construction contractors and clients to directly hold retention payments. Instead, Mr Aldous has proposed these retentions be ringfenced within a government-approved protection scheme.
CREDIT Chris McAndrew_Peter Aldous MP
Source: Chris McAndrew
A first reading took place in January and a second was scheduled for April, but the government pushed this back to October.
However, a divide has emerged between industry trade bodies over the Aldous Bill’s proposals.
Although dozens of MPs have backed the bill and 335,000 construction firms signed a petition in support of it, two of the industry’s heavyweight trade bodies have come out in opposition.
Build UK (said to represent 40 per cent of the industry) and the Civil Engineering Contractors Association (on behalf of major civils firms) have publicly rejected the bill, calling instead for the complete abolition of retentions.
Could these divisions cause the industry to fumble what some view as the best opportunity it has ever had to tackle retentions? And which of the options for change does the industry itself – particularly the smaller firms most at risk – really want to see?
What is the issue with retentions?
The Department for Business, Energy and Industrial Strategy published a research paper in 2017 on smaller firms’ experiences of late, partial or non-payment of retention monies.
Pye Tait Consulting was appointed to lead the research and found 71 per cent of construction firms had experienced late payment of retentions; 65 per cent of tier threes had been subject to partial or non-payment of retentions; and £229m in retentions was lost every year through upstream insolvencies. It estimated the amount held in industry retentions over a given year in England at between £3.2bn and £5.9bn.
“It angers me because this is simply causing problems for the industry. The industry wants a result on this and doesn’t want further delay”
Rudi Klein, SEC Group
Barrister and SEC Group chief executive Rudi Klein describes this as a “rotten system”, citing Carillion as an example of how contractors can abuse the practice by funding their business through retention monies, at the expense of supply chains.
The concept of retentions is also self-defeating, he argues, as clients put pressure on contractors to drive down costs, with contractors squeezing their supply chains in turn to deal with the pressure. Holding onto suppliers’ retentions is one of the ways contractors can make up these costs, which Prof Klein says creates a race to the bottom.
Aldous Bill: reasons behind the battle
There is disagreement over how best to tackle retentions, however, with the industry’s trade bodies splitting into opposing factions.
The two camps are made up of those who back the Aldous Bill’s plan to put retentions in a ringfenced protection scheme, and those against the bill in favour of eliminating retentions completely (see box).
Build UK and CECA are the bill’s chief opponents, while the Construction Products Association and the Chartered Institute of Credit Management have also declared their opposition.
Those who support the Aldous Bill include the SEC Group, the Federation of Master Builders, the National Federation of Builders and two of Build UK’s own trade body members: the Electrical Contractors’ Association and the Building Engineering Services Association.
Who stands where on the Aldous Bill?
More than 60 trade bodies have backed the Aldous Bill, including:
- British Board of Agrément
- British Property Federation
- British Engineering Services Association
- Electrical Contractors Association
- Federation of Master Builders
- Specialist Engineering Contractors’ Group
- 20 trade associations who are also members of Build UK
- Build UK
- Chartered Institute of Credit Management
- Civil Engineering Contractors Association
- Construction Products Association
Prof Klein says SEC Group has been “trying to drive this process for a long time” and claims that Build UK and CECA did not consult the group before announcing their position – much to his frustration. “It angers me because this is simply causing problems for the industry,” he says. “The industry wants a result on this and doesn’t want further delay. It is counter-productive.”
However, CECA chief executive Alasdair Reisner says: “I’m not sure I would recognise that characterisation. We were approached and said this wasn’t for us.” He adds: “I’m ill at ease with people suggesting we haven’t done things when we have.”
Build UK chief executive Suzannah Nichol says there is collaboration on retentions and insists the trade bodies continue to talk through their differences.
She says Build UK does not support the Aldous Bill because its members could not reach a consensus on it, adding that the proposals represent a “quick-fix solution” to the issue.
“The Aldous Bill would protect money in the event of insolvency,” Ms Nichol says. “But it doesn’t fix the problem. It’s not going to happen overnight.”
Suzannah Nichol CEO Build UK
However, FMB chief executive Brian Berry says the bill would at least provide action on retentions and more financial security for smaller firms. He calls for the industry to collaborate and provide a joined-up message to government, complete with a strategy on how change can be achieved. “We don’t disagree with Build UK’s position to abolish retentions,” he says, adding that this would be “fantastic”.
“The worry is understanding when we would do this by and how we can make it happen.”
Mr Berry says trade bodies must now sit down and discuss the next steps forward – something that has not yet happened. “We need to have a discussion with CECA and Build UK about their position and the practical steps they have put in place to support the abolition, or else it becomes a far-sighted dream that we never achieve. The Aldous Bill would at least [be] a halfway house and at least some progress [would be] made.”
Opinions are clearly divided over the bill. But the emergence of these factions could prove a further stumbling block to government action, Mr Berry says.
“We can choose to spend our energies on legislation and action to get rid of it, or legislation and action to ringfence and protect insolvency”
Suzannah Nichol, Build UK
He suggests the trade bodies’ splintered response to the bill has left parliament confused as to the best way to address retentions. “I met the construction minister, Richard Harrington, a couple of weeks ago and he said it’s up to the industry to go back to the government with a proposal about what it wants,” he says. “Obviously, this mixed messaging is not helpful to the government and they don’t know what to do.”
In contrast, Ms Nichol believes there is a clear message being sent out to the government from the industry: a zero retentions policy should be put in place.
She thinks efforts should be focused on abolishing retentions. “We can choose to spend our energies on legislation and action to get rid of it, or legislation and action to ringfence and protect insolvency. Some would say, ‘Why don’t you do both?’ Because there are only 24 hours in a day.”
Brian Berry chief executive FMB
Is the Aldous Bill the right way forward?
Are Build UK and CECA right to have doubts over the bill? Taylor Wessing senior counsel Natalie Pilagos thinks they are.
She describes the bill as an “admirable idea” to try to make sure retentions are paid when they should be, but one that is “too simplistic”.
“The issues that can arise on construction projects can be very complex, covering a number of things that may have gone wrong and multiple parties may be involved,” she says.
“I query whether this third party [that would administer the protection scheme] is going to be able to make robust decisions. If the idea is that money is put into a retention deposit scheme and a third party makes the decision whether to release the money, I query whether the organisation put in place to do this is competent.”
Ensuring that this third party is not acting in favour of one party over another also needs to be considered, she adds – as does the fact that a significant amount of commercially sensitive information from contractors would be handled externally under the Aldous proposals.
“You don’t feel any representation at all. You feel like a small fish in a big pond. Trade bodies are not in the trade, they just speak on behalf of the trade”
TJ Duncan Moir, A1 Flue Systems
In addition to concerns over how the Aldous proposals would work in practice, a recent announcement by Network Rail turned the spotlight on the bill’s underlying premise. The rail client will abolish retentions on its Control Period 6 programme and mandate 28-day payment terms for projects.
This indication that the industry has the ability to abolish retentions of its own accord could raise questions over whether a government ringfencing system is in fact necessary.
Network Rail’s mandate has been well received by suppliers further down the supply chain, such as Walker Construction. The firm’s managing director Phil Webb told CN that the rail client’s retentions ban was a positive step forward, adding that if the government mandated a similar initiative, it would help reduce payment concerns along the supply chain.
The industry’s voice
The lack of collaboration between trade bodies has left many construction companies frustrated, including A1 Flue Systems.
Director TJ Duncan Moir is unimpressed by the impasse and feels that companies like his are not represented by the trade bodies speaking to government.
“You don’t feel any representation at all,” she says. “You feel like a small fish in a big pond. Trade bodies are not in the trade, they just speak on behalf of the trade […] they are not suffering the retentions themselves.”
A1 Flue Systems has £750,000 tied up in retentions, according to Ms Moir, some from projects that were completed more than five years ago. She says that, although retentions should ultimately be abolished, the Aldous Bill could help provide better financial stability for companies in the meantime.
McGee finance director Paul Hickey agrees and says the company welcomes the bill, as retentions have a “detrimental impact” on subcontractors. “It deprives them of capital that is tied up, either fairly or unfairly, that could be used for investment in their business, including in people and talent,” he says.
“The bill is a step down the right path. However, we shouldn’t think of this as a massive concession. We should use this as a transition”
John Homer, North Midland Group
Holding a retention in a secure deposit scheme away from the client and contractor would be a good thing, Mr Hickey argues, but he worries that retentions will fall off the government’s radar if the industry does not get behind this initiative. “The danger is that nothing happens, and it will be harder to take that giant leap to abolishing retentions,” he says. “In the deposit scheme, people will begin to focus on the original intent for retentions and question whether we actually need them.”
North Midland Group chief executive John Homer believes the Aldous Bill is a step in the right direction towards ultimately abolishing retentions.
“There’s not going to be a paradigm shift,” he says. “The bill is a step down the right path and if it gets people around to a different way of thinking, that’s progress. However, we shouldn’t think of this as a massive concession and use it as a default position. We should use this as a transition to the end [abolition of retentions].”
Mr Homer adds that the different messages being sent to government from industry trade bodies could prevent this progress from materialising.
Aldous Bill or not, the industry seems to be on the same page when it comes to the need to take action on retentions. The question is: will the industry agree on what this action should be?