SEC Group

Cash retentions Bill set for first reading

The first reading of a Bill which aims to reform construction’s use of cash retentions will take place today in the House of Commons.

Introduced by Conservative MP Peter Aldous, the Construction (Retention Deposit Schemes) Bill has 11 sponsors drawn from all parties and has been backed by three industry associations.

The Specialist Engineering Contractors’ Group (SEC Group), which has been carrying out extensive lobbying to garner support for the Bill, described this as the latest stage in a long-running campaign to tackle the “abuse” associated with the practice of cash retentions in the construction industry.

SEC Group’s CEO, Professor Rudi Klein, said that the Parliamentary campaign began over 15 years ago with the (then) Trade and Industry Committee in the House of Commons being persuaded to launch an inquiry into the practice. The Committee declared the practice to be “unfair” and “outdated”.

Professor Klein added: “We now believe that this latest Private Member’s Bill has a good chance of being properly debated given the extent of cross-party support for the Bill.  We must succeed because the industry is losing almost £1m worth of retentions each working day because of insolvencies.  This does not take account of the millions of pounds lost by way of the costs associated with waiting years for the release of the monies and chasing up the monies.”

In April 2017 SNP MP Alan Brown laid a similar private member’s bill to protect cash retentions but it was overtaken by the general election.

SEC Group puts ‘3 Ps’ on 2018 construction wish list

Rudi Klein

The Specialist Engineering Contractors’ Group (SEC Group) is calling on government and industry to focus on procurement, payment and professionalism in 2018.

According to SEC Group’s CEO, Professor Rudi Klein, the industry’s only route to long-term improvements in growth and productivity lay in addressing the above “3 Ps”.

On procurement he said: “In spite of countless reports and initiatives the industry’s procurement and delivery processes remain as adversarial, and non-collaborative as ever with billions of pounds lost through process waste such as needless re-work.

“SEC Group will be calling on public and private sector construction procurers to submit new projects for piloting alliancing arrangements underwritten by integrated project insurance with the aim of achieving up to 20% savings.”

Regarding payment, Professor Klein added: “The construction industry is experiencing a financial crisis with large construction companies in financial distress and payments to SMEs taking longer and longer.

“SEC Group will be inviting both public and private sector clients to use project bank accounts to quicken the flow of cash to the supply chain. SEC Group is also promoting a Private Member’s Bill in the House of Commons to protect cash retentions.”

Finally, with professionalism, he said: “Two reports in 2017 have expressed grave concern over the lack of competence and falling standards in the construction industry.  These were the Report of the Independent Inquiry into the Construction of Edinburgh Schools and Dame Judith Hackett’s interim report on the Review of the Building Regulations.

“SEC Group will be calling on the Government to give consideration to a statutory regime for corporate competence similar to construction licensing schemes in the US and Australia. A licensing scheme – based upon current trade association schemes – will help to professionalise the industry.”

Professor Klein added: “We are in desperate need of a new and re-vitalised impetus to help make the industry leaner and fitter to meet many challenges ahead especially investment in digital and manufacturing technologies.”

Welsh government to adopt project bank accounts

Mark Drakeford

Mark Drakeford

The devolved government of Wales has announced it is to use project bank accounts (PBAs) from 1st January 2018 on all building projects over £2 million procured by government bodies.

Mark Drakeford, Welsh cabinet secretary for finance, said the decision was made to protect the supply chain from payment abuse and collapse of main contractors.

All Welsh public sector bodies have been told to “use project bank accounts where appropriate” and are being encouraged to use the revised and updated project bank account procurement advice note and implementation guidance.

The policy has been welcomed by various construction industry bodies, which have been lobbying for them to be widely adopted across the UK.

Cat Griffith Williams, national executive officer for Specialist Engineering Contractors’ (SEC) Group Wales/Cymru Wales, said: “Poor payment practices are the biggest killer of productivity and growth in Welsh construction. PBAs will help curb abuse and thus enable small firms to deliver to their full potential.”

Michelle Davies, from the Electrical Contractors’ Association, said: “Welsh government is to be congratulated.  Dealing with poor payment practices has to be the number one priority for construction.  I look forward to the time when we can half the threshold for using PBAs.”

Rudi Klein, chief executive of the SEC Group, added: “Wales now joins Northern Ireland, Scotland and the UK government in using PBAs in public sector construction. Evidence is now emerging that as well as protecting SMEs from abuse they are also helping to reduce the cost of construction.”

SEC Group Wales has produced guidance for construction clients, 12 Easy Steps in Setting up a Project Bank Account.

MP to bring forward Private Member’s Bill to ring-fence cash retentions

Peter Aldous MP

Peter Aldous MP

A backbench MP’s attempt to reform construction’s use of cash retentions has been backed by three industry associations.

Peter Aldous, Conservative MP for Waveney, has laid a Private Member’s Bill to protect the billions of pounds of cash retentions withheld from construction SMEs.

The Ten Minute Rule Bill will seek to amend the 1996 Construction Act and ensure that retentions within construction are held in a third party trust scheme. A key aim will be to help protect companies in the construction supply chain from insolvency and payment uncertainly. The first reading of the bill in the House of Commons will be on 9th January 2018.

While such bills almost never reach the statute book, they offer an opportunity for backbench MPs to highlight issues of concern and apply pressure to government.

Mr Aldous has received backing from the Building Engineering Services Association (BESA) and the Electrical Contractors’ Association (ECA) and the Specialist Engineering Contractors’ Group (SEC).

Cash retentions are ostensibly withheld as security in case a firm fails to return to rectify non-compliant work. But research commissioned by the Department for Business, Energy & Industrial Strategy (BEIS) has revealed that the monies are primarily withheld to bolster the working capital of the party withholding them. Furthermore the practice gives rise to widespread abuse with the monies being withheld for three and more years.

The research revealed that over a three-year period £7.8 billion worth of retentions was outstanding.

Peter Aldous said that he was concerned about the impact on SMEs: “I have been aware of retentions as an issue for a while, and with construction being a tough industry and uncertainty surrounding many aspects of the economy, small businesses need as much support as possible. There are a number of specialist engineering firms in Waveney, and what this Bill aims to do is to protect them and their livelihoods as well as 280,000 other construction SME’s nationwide.”

He added: “Over the past three years, £700m worth of retention payments to small businesses were lost due to the insolvency of a client, and if a small business suffers from an upstream insolvency of this kind, they are punished twice; firstly with the loss of work, and secondly with the loss of retention money. We therefore need action on this before more millions are lost.

“SMEs are the backbone of the UK economy, which is why they need support and protection. This Bill is not about abolishing payment retentions; it is about making sure that people’s money is safe so that businesses can grow and invest in their future.”

Professor Rudi Klein, the CEO of the Specialist Engineering Contractors’ Group, said the Bill had cross-party support.

He added: “I’m very grateful to Peter Aldous for initiating this. All that is required is mutuality of security. If cash retentions are required as a form of security, there must also be security for the cash as exists in many other countries around the world.”

ECA director Paul Reeve said: “This bill aims to protect the supply chain from the serious impact of lost retentions due to upstream insolvency. Way beyond those companies who are damaged by upstream insolvency, even the possibility of losing retention money in this way hampers small business investment and growth. As such, this bill is entirely consistent with the aims of the new industrial strategy, which looks for innovation and investment in skills”.

BESA legal and commercial director, Rob Driscoll, added: “To meet the challenges set by the recently launched industrial strategy and construction sector deal, enabling industry to re-invest in jobs, training, innovation and technological transformation, government intervention is necessary to secure working capital that underpins the delivery models for the industry as a whole.”

In April 2017 Scottish National Party MP Alan Brown laid a similar private member’s bill to protect cash retentions but it was overtaken by the general election.

Almost £700m of construction cash retentions lost over three years

money currency stockAlmost £700 million worth of cash retention has been lost in construction over a three-year period by reason of insolvencies, according to new Department of Business, Energy & Industrial Strategy (BEIS) research.

The figure, which consultants Pye Tait said reflects 2016 prices, has been described as “shocking” by the Specialist Engineering Contractors’ Group (SEC Group) and far in excess of its own estimates.

SEC Group’s CEO Rudi Klein said that this vast sum, without more, justified legislation to ring-fence retention monies.

He said: “The bulk of these monies will have been lost by SMEs. They legally belong to the firms from whom the monies were withheld; consent to the withholding of the monies did not extend to their being used to pay off the insolvent party’s creditors. This represents a scandalous and continuing drain on the scarce resources of SMEs in the construction industry.”

SEC Group – which represents the largest sector in the construction industry (by value) – has been campaigning for all cash retentions to be deposited with independently run retention deposit schemes.

Rudi Klein added: “Given the dire finances of some of the UK’s largest construction companies it is even more urgent that Parliamentary time is secured for legislation to protect retention monies.”

BEIS is currently consulting on whether cash retentions should be lodged in a statutory retention deposit scheme.

Industry urged to advise government on statutory solution to ring-fence cash retentions

crane-stockThe Specialist Engineering Contractors’ Group (SEC Group) has welcomed the publication of the independent review on cash retentions in the construction industry.

The review was commissioned by the UK government following an amendment to the Enterprise Bill laid by Lord Aberdare in 2015 and drafted with help by SEC Group.

An estimated £7.8 billion of retentions has been unpaid across the construction sector over the last three years. The review confirms that retention monies lost to the industry due to contractor insolvencies are of great value – SEC Group estimates this to be £40 million each year.

SEC Group has highlighted the abuse of cash retentions which occurs in the industry at the financial detriment of the construction supply chain.

The review confirms that:

  • Delays in paying retention monies are commonplace in the construction sector
  • Currently there is no protection for sub-contractors from upstream insolvencies, as retention monies held against their work are not ring-fenced; multiple contractors within the supply chain could be affected by insolvency of one large main contractor or client.

SEC Group said this is affecting the livelihoods of many SMEs in the construction industry, and has welcomed the government’s commitment to address the issue of cash retentions following the launch of a new consultation.

The construction representative body said it will stress that for any solution to be effective, it should include protection of cash retentions within a statutory framework, similar to those which already exist in other countries such as Canada, Australia and New Zealand.

SEC Group said: “We will examine and respond to all the solutions proposed through the consultation and we are particularly pleased that the option for a deposit scheme is included as one of the possible mechanisms.

“We will be pressing upon government that this issue of protecting cash retentions should now be an urgent priority given the current financial instability in the industry.

“We are urging every company in the industry to respond to this consultation by 19th January 2018.”

Only a third of public sector contracting authorities comply to supply chain payment requirements

SEC Group ScotlandThe umbrella body for Scotland’s engineering sector has urged the public sector to do more to improve supply chain payments after a survey revealed that almost half of the country’s contracting authorities were not considered to be compliant with their statutory payments requirements.

On April 18 last year, contracting authorities in Scotland with large annual procurement budgets became statutorily bound to declare (in their procurement strategies) how they intended to ensure 30 day payments along their supply chains.

In the first of its kind the Specialist Engineering Contractors’ (SEC) Group Scotland has surveyed contracting authorities (other than local authorities) to establish the extent of compliance with this requirement.

From a total of 29 responses it was found that only 9 of the contracting authorities (31%) were considered to be compliant with 13 (45%) considered to be not compliant.

On the evidence provided it wasn’t absolutely clear whether 4 (14%) authorities were compliant, while 3 (10%) authorities were taking steps to comply.

According to SEC Group Scotland, the primary reasons for non-compliance were a lack of evidence demonstrating that 30 day payments were required in tiers 2 and tier 3 contracts (i.e. sub-contracts and sub-sub-contracts) and a lack of indication of measures such as performance monitoring to ensure compliance along the supply chain.

There was also failure to accurately reflect the requirement in the legislation – [section 15 (5)(d), Procurement Reform (Scotland) Act 2014] – that the 30 days commences from presentation of invoice or similar claim.

Commenting on the findings, Eddie Myles, SEC Group Scotland’s chairman, said that it was still “early days” but contracting authorities’ required clearer guidance on what they needed to do to ensure compliance.

He added: “Anecdotal evidence from SMEs in our sector suggests that little has changed.  The easiest way to ensure compliance in many cases is to use project bank accounts as suggested in the statutory guidance accompanying the legislation.”

SEC Group has incorporated the survey results in a report to the cabinet secretary for finance and the constitution and the minister for business, innovation and energy.  The report has a number of recommendations including the appointment of a ‘Construction Regulator’ to oversee compliance and promote best practice in public sector procurement.

Late payments leading to ‘cashflow crisis’ for small contractors

building stock 2Current cashflow problems in the construction sector are “unsustainable” as small firms are increasingly having to rely on directors for funding, the Specialist Engineering Contractors’ Group (SEC Group) has warned.

The group, which represents SMEs in the construction engineering sector, said late and lengthy payment periods from large contractors and a lack of access to reasonably priced lines of credit are to blame for the crisis.

SEC Group CEO, Professor Rudi Klein, said that these figures were extremely worrying.

He said: “With SMEs now relying more and more on their directors for their liquidity the cashflow position in the industry is now critical.”

The SEC said that research by Funding Options, a small business finance marketplace, showed that directors of smaller construction companies had been putting more of their own cash into operations. Directors lent small sub-contracting businesses £38 million in 2015-16, up 28% on 2013-14. The businesses included in the research include specialist trades such as electricians, plumbers, plasterers, decorators and roofing companies.

This is against the background of the poor state of the balance sheets of the UK’s largest construction firms recently highlighted by the debt-ridden problems faced by the nation’s second largest construction company Carillion.

Professor Klein added: “These companies are taking longer and longer to pay their supply chains with SMEs having to spend the bulk of their contract values up front before receiving any payment.”

SEC Group is calling for the issue of slow payment to be tackled through the mandatory use of “project bank accounts” on all public sector construction jobs. Suppliers would be paid from an account specific to the project they were working on. It stops suppliers at the bottom of the chain having to wait until those further up have been paid before their own bill is settled.

The contractors’ group is also pressing the government to introduce legislation to ring-fence cash retentions and make 30 day payments mandatory.

Support grows in Westminster for campaign on cash retentions

Newell McGuiness

Newell McGuiness

The campaigning trade body for Scotland’s electrical sector has thrown its weight behind increased pressure from MPs over the vexed issue of cash retentions within the construction industry.

SELECT is once again highlighting the issue in advance of a government review of the Construction Act which is expected to include actions such as the ring-fencing of cash which is owed to supplier firms.

Stuart McDonald, SNP MP for Cumbernauld, Kilsyth and Kirkintilloch East, last month tabled a parliamentary question about the late release or even non-release of cash retentions. He was supported by Toby Perkins, Labour MP for Chesterfield.

In February this year, the Specialist Engineering Contractors’ Group (SEC Group) revealed that more than £1 billion in cash retentions is being withheld by UK top construction companies from their SME sub-contractors.

Newell McGuiness, managing director of SELECT, which is a constituent member of SECG, said: “We wholeheartedly support action on this troubling issue and look forward to positive developments in the upcoming review of the Construction Act.”

The SEC Group has been a tireless campaigner on the retentions issue. Just two years ago it published a damning report which showed that public bodies such as councils and universities were denying struggling Scottish firms access to cash owed simply to improve their own cash position regarding working capital.

The research also revealed that while many bodies paid their primary contractors within 30 days, little effort was made to ensure that secondary or sub-contractors got the same treatment.

Rudi Klein, chief executive of the SEC Group, said there had been tremendous support in Westminster on the issue.

He added: “After many years of SEC Group campaigning, it seems that we are now making progress towards protecting cash retentions.

“This has to be the road map to enabling construction SMEs to grow and innovate.”

Local authorities hear how PBAs can improve construction payment practices

Rudi Klein

Rudi Klein

Representatives from over half of the councils in Scotland attended a seminar in Stirling to hear how project bank accounts (PBAs) can overhaul payment practices in construction procurement.

There is a statutory obligation on all public bodies in Scotland with large construction spends to ensure that supply chain firms are paid within 30 days.

Speaking on behalf of the Scottish Government, Colin Judge encouraged the local authority representatives to consider setting up PBAs which enable all those delivering construction works to receive their payments directly from one bank account.

He explained that payments do not, then, have to pass through the different layers of the supply chain (with the result that many SMEs are waiting over 60 days to get paid). PBAs enable small firms to receive payments regularly with protection from any insolvencies at the top of the supply chain, he added.

Hilary Cameron from Transport Scotland, which piloted one of the first PBAs in Scotland, highlighted that the trial use of a PBA had demonstrated that it was feasible for payment to PBA beneficiaries to take place well within the 30 day statutory payment.

Professor Rudi Klein, from the Specialist Engineering Contractors’ Group (SEC Group), said that PBAs were the most effective method for ensuring that all in the supply chain were paid. He added that every SME in Scotland would support those public bodies setting up PBAs.

Also during the seminar, Ann O’Connell, chair of the drafting committee of the Scottish Building Contract Committee (SBCC), explained the SBCC’s support of PBAs and that standard PBA documentation was available from the Committee.

Finally, Scott Culbertson from The Royal Bank of Scotland gave an overview of how RBS is able to support public bodies in setting up PBAs.