Late payment by retention is holding the construction sector back.
10th June 2019.
Late payments of retention money is holding the construction sector back according to a government report.
What are retentions
The retention system is an industry standard of witholding payment of a percentage of payments due on completed work (often 5%). The money is retained although the amount certified was due to the contractor on an interim certificate. The retention is deducted from the amount due and retained by the client. The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract such as dealing with any snagging.
Retentions are common in UK construction projects. The agreed percentage of every payment that becomes due to a contractor for its work is withheld. The money accumulates throughout the project. Usually, half of the retention is released on completion and the balance around 12 months later, when defects have been made good.
The retention is supposed to give the main contractor security. It encourages the sub-contractor to come back after completion and fix defects and protects the contractor against the sub-contractor’s insolvency. If the sub-contractor is unwilling or unable to rectify defects later, the contractor can use the fund to pay for work that needs to be done.
Often even after all works and snags are completed, the contract allows the contractor to only release half the retainer and ehe final 2.5% retainer is not released until completion of the project. We have come across many instances where a main contractor will delay paying the groundworks contactor until the carpet laying subcontractor has finished their snagging! If the subbie is no longer around then there is an even longer delay.
If the sub-contractor is forced to close down or goes bust before the retention is paid out then under most new contracts the main contractor does not need to pay it at all and can keep the retainer, hurting the owners and creditors of the sub-contractor.
Concerns have however been expressed about the abuse and misuse of retentions, which can have a huge impact on smaller construction firms in particular, but despite numerous attempts by the UK government to look at this issue, no action has materialised.
Calls to reform retentions
The Business, Energy and Industrial Strategy Committee has previously demanded an overhaul of the retentions system to include project bank accounts.
MPs are also calling for maximum 30-day payment terms in construction to become law.
The hard-hitting report from the Business, Energy and Industrial Strategy Committee is also demanding an end to early payment schemes which charge suppliers a fee to get their cash.
The report states “We recommend that the Government moves as soon as possible to require all medium and large companies to adopt a statutory limit of paying within 30 days. This statutory limit must exclude the use of early repayment schemes or discounts to bring companies within compliance.”
It went on to say “Big companies have a vested interest in holding on to owed money for as long as possible to maximise interest. More disturbingly, as the collapse of Carillion demonstrated, there is a concern that many large companies at the top of the supply chain are building this into their business models and if they go bankrupt this money is lost to other creditors. This could be addressed by the introduction of independently managed project accounts, to hold retention money.”
“We recommend that the Government should bring forward proposals as soon as possible to introduce compulsory project accounts so that retention money can be held independently and its release subject to fair and timely oversight.”
Rachel Reeves, Chair of the Business, Energy and Industrial Strategy Committee said: “Many SMEs are placed in a stranglehold by larger companies deliberately paying late and ruthlessly taking advantage of their suppliers, causing these firms financial instability.
“Unless the Government levels the playing field and acts to bring in a tougher regime for poor payment practices then we choke-off the opportunity for SMEs to invest and grow in the future.”
The report has been welcomed by industry payment campaigners, Neil Walters, national chair of the NFB, added: “Late payers continue to win public work and small businesses are left begging for their hard-earned money. Voluntary reform is simply not working and the Government needs to wake up and legislate statutory requirements to make late payment a relic of the past.”
ECA Deputy Director of Business, and SME Business Adviser to the Cabinet Office Rob Driscoll said: “This is a significant milestone. Government is now setting the tone for acceptable supply chain payment behaviour, and realising its role as a leading and responsible client in the post-Carillion era.”
Westminster has repeatedly failed to tackle the controversial use of ‘retentions’ to delay payments in the construction industry.
The hope is that the government might eventually bring the country into line with other jurisdictions, which currently do more to protect small contractors from bad payment practices of the big players.
Construction being held back
British construction firms report having almost a third less work in the pipeline than a year ago, with Brexit and the collapse of larger contractors a major worry, an annual survey of subcontractors showed .
Subcontractors reportedly have 19 weeks of work to fall back on, down from the 27 weeks reported last year, according to the survey by trade finance provider Bibby Financial Services.
The subdued mood echoes official construction data released on Monday, which showed a sharp slowdown in annual growth to 2.4% in April, while May’s IHS Markit/CIPS construction purchasing managers’ index (PMI) dropped to its lowest since March 2018.
Bibby’s managing director for construction, Helen Wheeler, said “It’s been a tough year for the subcontracting sector, with the industry reeling from the collapse of two large high-profile contractors – and further impacted by the recent announcements regarding British Steel” as she referred to the collapses of major contractors Interserve this year and and Carillion last year. The collapses had hit thousands of small suppliers and left them far more cautious.
Brexit is the most commonly refered to cause of danger, named by 25% of firms, but two thirds of the subcontractors said they had not prepared for it.
“Brexit, the dominance of large contractors and late payment problems are all acting as brakes on the sector,” Wheeler said.
The damage caused by retentions
Retentions mean payment for work done is delayed, sometimes substantially. Sub-contractors working on larger projects might have to wait until the main contract (or a subsequent phase of work) is completed for the retention to be released. Sub-contractors often seriously lack visibility on when retentions will be paid.
This delay in payment can cause hardship, particularly for smaller sub-contractors down the contractual chain, who have to wait longer to be paid. Retentions choke cashflow and reduce the ability of contractors to invest in their business. Chasing for payment diverts valuable resources, and late payment can contribute to a business becoming insolvent. The smaller the business, the harder it is likely to be hit.
The risk of upstream insolvency is of even greater concern. It is not currently a requirement for the retentions to be protected in any way. They are normally just sitting in the account of the main contractor – or more realistically being used to boost their own cash flow – until paid. If the main contractor becomes insolvent, the retentions are not protected and the money due is listed along with all other unsecured creditors. Leaving the sub-contractor lucky to get pennies on the pound.
Around 44 per cent of sub-contractors have suffered non-payment due to an upstream insolvency in the last three years. Large main contractor failures, such as the 2018 collapse of Carillion, can have a dramatic effect on businesses left out of pocket, with a knock-on effect on the ability of the UK’s construction industry to operate as a whole.
The current business model of infrastructure construction in the UK runs with unsustainable operating margins, and Civil Engineering Contractors Association (CECA) believes that a total overhaul of payment within the sector will be required if industry is to deliver the substantial pipeline of projects that are planned in the coming years.
Commenting, CECA Director of External Affairs Marie-Claude Hemming said: “Since the collapse of Carillion and in the ongoing period of uncertainty relating to our future trading conditions once Britain leaves the EU, many contractors are continuing to be squeezed by onerous payment conditions, with smaller businesses particularly badly affected by razor-thin and unsustainable margins.
“That’s why CECA has long supported the total abolition of cash retentions. If our industry is to deliver the Government’s pipeline of planned investment in the coming years, if must do so on a model that is sustainable, and not prejudicial to the ability of smaller companies, many of which are SMEs that focus on specialised aspects of project delivery. At the same time, alternative solutions must be found to provide security in the event of any defects in the projects delivered.”
Previous attempts at reform
There have been past attempts to address this issue at a UK-wide level. One of the key recommendations in Sir Michael Latham’s 1994 report Constructing the Team was for government legislation to be introduced to protect retentions. The report’s other payment recommendations became law in the 1998 Construction Act, but his recommendation on retentions did not.
Towards the end of 2017, the Department for Business, Energy & Industrial Strategy launched a consultation on retention payments in the construction industry. It closed in January 2018 but no recommendations have been published to date.
In January 2018, Conservative MP Peter Aldous introduced a Private Members Bill, called The Construction (Retention Deposit Schemes) Bill 2017-19, into the House of Commons. The purpose of his Bill is to protect retentions by placing them in a retention deposit scheme. Failing that, the money will have to be paid out in full within seven days. However, the second reading of the Bill has been delayed on numerous occasions, unfortunately pushed to one side in the political wake of the Brexit process.
The UK is now seriously out of step with other jurisdictions, which have legislated to ring-fence cash retentions or allowed contractors to provide alternative means of security.
The Scottish Government has announced it intends to consult separately on this issue. This is to be welcomed and it might hopefully spur Westminster into action, paving the way for better payment practices across the UK construction sector.
Positives to be had
There is widespread sentiment in the construction sector that change is needed in terms of smoothing payment at all levels in the sector.
Better payment by clients and through the supply chain will release more money to invest in efficiency and productivity, boosting the business cycle, preventing insolvencies and boosting the entire sector which will deliver better outcomes for customers and the country.
Are you owed money by a contractor?
With pressures on the UK construction industry it is essential that you stay on top of the credit limits you grant contractors and watch carefully for any late payments.
With tightening cash flow they will look for the easiest option to boost their cash-flow. Don’t let it be you.
You can’t just assume your customers can and will pay you, no matter how big their name is.
It is essential to have credit management systems in place to monitor and check your customers credit worthiness.
It is also best practice to use a trusted third party like CPA to make sure you are paid on time by customers, no matter how good a name they have.
See the section below – About CPA.
If you are also struggling, do you realise you could be sitting on a fortune?
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If you trade with other businesses and were often paid late then you could be entitled to significant compensation.
Under little known and under-utilised legislation your business could be due huge amounts in compensation that you didn’t even know about.
Let’s be clear – this is not a way to weaken any customer relationships you value. It is one that identifies who’s been paying late and then recover the potentially significant sums in compensation using Late Payment Legislation from businesses where the relationship has already ended.
You can pick and choose who you want us to follow up – but once we’ve agreed which companies you’d like to pursue compensation from it’s a fast process and there’s no financial outlay to you whatsoever. My team at CPA put its expertise to work to recover the compensation due and fight late payment culture.
That compensation could be the cash rescue your business needed.
But don’t delay, that compensation evaporates if not claimed within six years of the late payment.
How can CPA help?
CPA has developed a unique technology to dig into your accounting records and discover the cash injection you are due by means of compensation. The software does all the hard work. Our software interacts over the cloud with over 300 different software packages, working directly with your accounts package, just so long as it’s stored on a computer.
We recognise that most companies do not have the resources to spend time on the identification and calculation of Late Payment Compensation. Our service can produce an Analyses within just a few days with (usually) less than 30 mins of co-operation from our clients. We work directly with over 300 accounting packages but can also work with bespoke accounts packages. Indeed, speed is essential as the oldest invoices may fall foul of the 6-year time limit.
Once the Sales Ledger Analyses is made available to clients, all that is required is that management decide which commercially sensitive ex-customers to remove from the list and return it to us.
CPA then uses its years of collection experience to explain and recover the Late Payment Compensation Claims. Clients do not handle any part of the recovery process as our team will take all communications from the companies against who the claims has been made. Often, it’s simply a case of explaining the legislation, sometimes we have to go all the way and enforce the legislation through the courts.
The result is that we are realising clients’ claims worth tens and sometimes hundreds of thousands of pounds which, of course, is pure net profit. You may also be among the recipients of “hundreds of thousands of pounds” should you elect to take advantage of our services.
We do the work, you receive the cash.
If you have supplied goods and services to businesses on credit and were regularly paid late then you could be due significant sums in late payment compensation.
We are talking to companies and unearthing claims in the hundreds of thousands from former business customers who paid them late. Large business customers who abused their power to inflict unfair and sometimes illegal payment practices.
We are helping companies that were looking to close down, who looked insolvent and finding that cash injection they need to avoid insolvency.
CPA is passionate about late payment
The Credit Protection Association has been protecting smaller firms against poor payment practices for over 100 years.
We are passionate about breaking the late payment culture that holds back the UK economy and threatens many SMEs with cash flow difficulties being the single biggest killer of Britain’s small businesses.
If you were regularly paid late we can help. Those former customers used you to boost their own cashflow, regularly paying you late.
As a result you had extra costs, you had the distraction of having to chase payment, you had opportunity costs because your capital was tied up in their late invoices.
Under little used legislation, you are entitled to compensation for those late payments.
Now you can boost your own cash-flow.
CPA can help unearth the those hidden treasures.
We have the technology to reveal the compensation you are due and we have the extensive experience and expertise to then turn those claims into cash.
Yes, CPA can help you boost your business cashflow.
Don’t let your bankers control you, contact CPA today.
About CPA
The Credit Protection Association can help!
Formed in 1914, CPA has been providing credit management services to SMEs for over 100 years.
At the Credit Protection Association, we provide first class credit information that can help you avoid being over extended to customers who are at risk. Our monitoring service can flag up warning signs long before the end, giving you the chance to adjust and reduce your exposure. We provide recommended credit limits and credit scores on a traffic light system and can help you set appropriate credit policies for your customers.
We regularly publish lists of the latest insolvencies but by then it is too late. Our credit reports however predict approximately 96% of company insolvencies long before they arrive.
Companies in trouble usually have very bad cash flow and they try to deal with it by delaying payment to their suppliers, increasing your exposure to them.
If you supply big contractors or small ones, help us help you identify the risks.
Why use a third party collector?
As a third party collector, we can also get your payments prioritised over those who are not as hot on collections. When you customer receives a letter from the Credit Protection Association regarding their outstanding account, they are going to want to get that resolved as a priority. Our overdue account recovery service can get your unpaid invoices to the top of their “to do” list and get your invoice paid.
Over the years we have collected billions in overdue invoices for our customers.
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