The Civil Aviation Authority (CAA) has fallen foul of government fair payment pledges after demanding a 5 per cent retention fee and a 10 per cent performance bond before awarding a contract.
Requiring either a retention fee or a performance bond is common practice in contracting but asking for both is seen as onerous.
A recent contract let by the CAA, seen by Construction News, insisted suppliers sign up to both terms, a move which, if widely applied, could have a dramatic effect on contractors’ cash flows.
The government has made extensive pledges to improve access to public sector contracts for construction SMEs and to improve payments.
One subcontractor said: “We hear a lot about fair payment and helping smaller firms, but there are still some clients that use these kinds of terms.
“You expect it in the private sector, but not when it’s a public sector client.”
Specialist Engineering Contractors Group chief executive Rudi Klein said: “It is simply not acceptable in the public sector to have these sorts of conditions imposed, because it obstructs access for SMEs to public sector work.
“Having a performance bond and a retention fee is overkill. It means both cost of construction and the cost to SMEs goes up.”
Professor Klein said the policy was in direct contradiction to the government’s waste-reduction ambitions. He said: “Clearly, doubling up on the security you demand must be wasteful.”
He added: “Government guidance is that public sector procurers have got to apply best practice and encourage SMEs.”
But a CAA spokesman defended the combined use of bonds and retention fees, arguing that, while the authority was in the public sector, it was funded entirely by charges on the aviation industry, and not by the taxpayer.
He said: “Those charges are rightly subject to scrutiny from industry and, whenever the CAA undertakes a contract, we try to use methods that ensure industry’s money is spent wisely and competitively.
“As part of a recent tender and following the advice of an independent third-party consultant, the CAA decided to include performance retention fees in the contract.
“These were considered an appropriate tool, relevant to the sector the contract applied to.
“The use of retention and performance bonds can be a method of ensuring value for money and guaranteeing completion of contracts satisfactorily.
“We may use them on a case-by-case basis as and when projects where they may be applicable are contracted.
“Any contractual arrangements we make are in confidence and therefore it would be inappropriate for us to divulge the detail of these.”
But Professor Klein dismissed the claim that the use of bonds and retention would ensure value for money, describing it as “absolute nonsense”.
“We know it delivers extra cost and, in doing so, delivers extra waste,” he said.
Cabinet Office minister Francis Maude has previously set out his ambition that 25 per cent of public sector contracts should be awarded to SMEs.
And the government’s Construction Strategy, published in May, specifically states one of its strategic objectives to be “to speed cash flow through the supply chain through fair payment provisions”.
Responding to the CAA’s actions, a Cabinet Office spokesman said: “We have been clear about the importance of both fair payment and certainty
of payment, and of making sure that opportunities remain open to SMEs.”
The spokesman would not comment on whether bonds and retention could be used together under government guidelines for fair payment to construction suppliers.
He said: “Each procurement needs to be considered individually, taking account of its particular circumstances and risks.”