Many sub-contractors are facing an uncomfortable wait to find out if they will receive payments that were due from Carillion before it went into liquidation.
Unfortunately, it’s likely that a large number will have to write off the debt. In a meeting with the administrators overseeing the liquidation (PwC), Building and Engineering Specialists Association (BESA) representatives were informed that sub-contractors would be at the back of the queue for payments.
The collapse of Carillion has revealed what many in the industry already knew: that retentions abuse is a practice SME contractors in the construction sector deal with on a wearingly regular basis.
There's a straightforward and fair approach to solving this major problem.
Where is the money?
The problem is not necessarily with the practice of retentions themselves (although BESA has stated that it is anti-retentions). But it does offer clients and main contractors some security that work is going to be completed before payment is made in full.
However, problems arise with how retentions monies are handled.
At the moment, it’s standard practice for the payer to hold on to retentions payments until they are due. That is, the cash remains in that company’s back account; are included in that company’s cash flow; and can quite legally be used to fund its business.
This means that, if an unscrupulous company wishes, it can quite easily withhold retentions payments, even when they are due. There are many reasons that can be found for doing this – loopholes in complex contracts; changes to payment systems (real or invented). Most sub-contractors can share stories on ‘why we weren’t paid this time’.
Unfortunately, while one company hangs on to the retentions sums, that money is at risk because if the company goes into liquidation or declares bankruptcy, the money is included in any calculation of assets.
And that usually means that the small businesses which are owed the cash are unlikely to see it.
Millions being lost
To put this in perspective, this sort of retentions practice has been abandoned by many other countries, including the USA, Germany, Australia and Canada.
Yet here in the UK, recent government research indicated that £700 million (at 2016 prices) worth of retentions was lost as a result of insolvencies.
This means that for each working day the construction industry is haemorrhaging almost £1 million of cash retentions. This statistic alone justifies urgent intervention to ring-fence the monies.
This lack of security for cash retentions has recently been highlighted by concerns over the financial position of some of the largest UK construction companies.
Proposals to end this state of affairs have been made before, but for a number of reasons (some not entirely clear) they have been rebuffed by government.
In January 2018, the BESA and ECA achieved a reading of the ‘Aldous Bill’ (named after Peter Aldous MP who introduced it) with the backing of many other industry associations, and cross-party support.
The aim is simply to change retentions practice to remove the risk to smaller sub-contractors, and hopefully to release those lost monies back into the industry.
Removing risk for smaller sub-contractors
The three main provisions of the Aldous Bill are:
There will be a statutory obligation on any party withholding cash retentions to place them in a retention deposit scheme
Held in trust
The operators of the scheme would hold the monies in trust so that they cannot be accessed by insolvency practitioners
This will be brought in as an amendment to the Construction Act. Therefore, this will apply to all contracts within the Act (contracts with householders are not included)
Failure to deposit retention monies in a scheme will render invalid any contract clause enabling the withholding of cash retentions
Disputes regarding the release of the monies can ultimately be referred to statutory adjudication
The Government will be required to provide regulations for the operation of retention deposit schemes
Holding back investment
It’s a straightforward and fair approach to solving a major problem.
BESA research shows that money lost in retentions abuse is preventing investment by construction companies in growth, training, apprenticeships and adoption of new technologies.
And these are the very activities that government is asking the construction sector to adopt in its Construction Sector Deal.
So, it is hoped that from the disaster of Carillion, a new drive can be found to put right the wrong of attentions abuse, with a view to getting the construction sector on a firm footing and able to deliver all the projects, including housing, that government so desperately needs.
Karen Fletcher is editor of Modern Building Services.