SEC Group

Sector ‘cautiously welcomes’ Chancellor’s call for late payment evidence

Philip Hammond

Chancellor Philip Hammond’s announcement of a new consultation on late payment has given a cautious welcome by the construction sector.

Delivering his Spring Statement to Parliament this week, the minister issued a call for evidence “on how we can eliminate the continuing scourge of late payments – a key ask from small businesses”.

Trade body the Specialist Engineering Contractors’ (SEC) Group has been driving the construction industry’s efforts to improve cashflow security through the use of project bank accounts and by ring-fencing cash retentions.

SEC Group will be inviting the Chancellor to act swiftly to implement measures that will provide long-term payment security for small firms which comprise the overwhelming majority of businesses in the UK’s construction industry.

CEO Rudi Klein said that over the last 10 years there have been almost 25 different initiatives, reports, codes and charters concerned with improving payment performance in construction but the industry continues to be the worst sector for payment abuse.

He added: “All these initiatives etc. have not brought about the hoped-for improvements in cashflow security. However the wording of the Chancellor’s statement appears to show a determination to deal with the problem once and for all.”

SEC Group intends to urge the Chancellor to support legislation that will mandate the use of project bank accounts and ensure that retention monies are protected in the event of insolvencies up the supply chain.

The Federation of Master Builders (FMB) said the Chancellor’s announcement should be the beginning of the end for unfair payment practices which hit small businesses across the UK.

Chief executive Brian Berry said: “The Chancellor’s announcement of a consultation to tackle the scourge of late payment today should mark a turning point on this issue. We should use this opportunity to bring about a spring clean of payment practices which negatively impact on small business. Construction giant Carillion’s collapse at the start of the year brought to light once again the need to eliminate poor payment practises that plague the construction sector particularly.

“Indeed, one London based small building firm was once paid more than 270 days late by a construction giant. Now is the time to move away from these unsustainable business models which threaten the existence of many firms and their supply chains. This announcement today should be followed by a fundamental rethink ending in the permanent abolition of late payment terms and the exploitative use of retention payments.”

Mr Berry added:  “At first glance the Spring Statement has brought some other positive announcements for the UK’s small construction firms. The announcement of a doubling of funding to the Lloyd’s Housing Growth Partnership and an additional £80 million funding to support SME firms looking to engage an apprentice is welcome news. With Brexit looming large on the horizon and the construction industry facing a chronic skills crisis, it’s of the utmost importance that more skilled workers begin to join the sector. An additional £50m to support T level training will further aid this aim.”

Trade body strengthens voice with new member

The Specialist Engineering Contractors’ Group (SEC Group) has welcomed another organisation into membership as the Scaffolding Association joined at the beginning of the month.

Over the last year SEC Group has been receiving a number of inquiries from organisations representing specialist contractors.

The group said the interest has been triggered by its strong messages on payment security, greater collaboration in the procurement and delivery processes and on professionalising the industry.

These messages now have greater resonance in the aftermath of the Edinburgh schools inquiry, the Dame Judith Hackitt interim report on building safety and more recently the Carillion collapse, the group added.

Robert Candy, CEO of the Scaffolding Association, said: “We feel that there is a strong synergy between our aims and objectives and those of the SEC Group, through effective collaboration we will be able to create a stronger voice for specialist contractors.”

Welcoming the Scaffolding Association, SEC Group’s CEO, Professor Rudi Klein, added: “We are now the only UK construction representative body that exclusively acts on behalf of the interests of specialist contractors which deliver the bulk of the industry’s added value. I look forward to working with Robert and Scaffolding Association members.”

Time to ensure action on retentions, say construction leaders

Construction trade federations across the UK are continuing their push for action on cash retentions.

The National Federation of Builders (NFB) and other trade federations with members most likely to be affected by the collapse of Carillion believe this is an opportunity for the industry to move swiftly to an agreement.

The SEC Group, The Electrical Contractors Association, Building Engineering Services Association, British Constructional Steelwork Association, Lift and Escalator Industry Association, National Association of Shopfitters, Scottish Building Federation, Electrical Contractors Association of Scotland and the Scottish and Northern Ireland Plumbing Employers’ Federation have all joined the call for an end to retentions by 2025.

The NFB said its hopes they will give their full backing to the Construction (Retention Deposit Schemes) Bill 2018 introduced by Peter Aldous MP so that the industry can put an end to risking the “£1 million lost each day” to upstream insolvencies.

Richard Beresford, chief executive of the National Federation of Builders, said: “While there may be justifications for retentions, abuse across both the public and private sectors saps the supply chain of much-needed cash flow. This has a negative effect on the overall health of the construction industry.”

Robert Hudson, chief executive of the National Association of Shopfitters, said: “This obscenity perpetuated by tier one contractors has been allowed to go on unabated for far too long starving the supply chain of much needed cash to invest in training and apprenticeships.”

Vaughan Hart, managing director of Scottish Building Federation, added: “The size and scale of the insolvency of Carillion has brought the issue of retentions in the construction industry into sharp focus. However, it should be borne in mind that the majority of the retention monies withheld do not sit in the hands of main contractors, but remain with their clients. If retention monies have been released by the client on a project and not issued to the supply chain, this practice should be outlawed.

“The abolition of retentions is something that SBF would welcome, but in the absence of such an undertaking, the implementation of trust schemes for retention monies, or more significantly better rules governing the defect liability period and process, should be considered to ensure that the main contractor is held accountable to manage the defect rectification process in an efficient and timely manner. The supply chain must be afforded better protection.”

SEC Group chief executive, Rudi Klein, said: “We must never be placed in a position again where thousands of firms have lost their retentions – monies they legally own – because of large insolvencies up the supply chain.”

With almost £1 billion in retentions being lost as a result of Carillion’s liquidation, the NFB said the industry must not waste this opportunity to take what is a simple step to putting the entire supply chain – regional contractors, SMEs and specialists – on a more long-term sustainable footing and showing that the sector can work together.

Small businesses back trade body’s call for project bank accounts

FSB national chairman, Mike Cherry

A long-running call by the Specialist Engineering Contractors’ Group (SEC Group) for the use of project bank accounts is now being backed by the Federation of Small Businesses (FSB).

The construction trade organisation has been lobbying for the use of PBAs for many years with the issue being highlighted in the wake of the collapse of Carillion last week.

The FSB has written to David Lidington, minister for the cabinet office, urging the UK government to extend the use of PBAs for all major public projects to ensure that businesses are protected against catastrophes, such as Carillion’s demise, happening again.

PBAs enable all those delivering infrastructure and services to be paid out of one pot – a ring-fenced bank account. Those in favour of them argue that if PBAs had been in place on all Carillion’s contracts, the losses incurred by the supply chain would have been significantly less.

The FSB said the practice which would see money for a public project held in trusts as opposed to by a tier 1 contractor. This would protect businesses throughout the supply chain if a big firm, running a public project, goes bust and would allow them to be paid for work they have already completed.

Furthermore, holding project money in trusts would help stem the poor payment practices used by some bigger companies as it allows money to be released promptly as and when work is completed, the organisation added.

Major projects, such as the £14.8 billion Crossrail project, have already implemented similar arrangements, as have construction spending departments including Highways UK.

FSB national chairman, Mike Cherry, said: “Sadly this sorry saga has laid bare the danger of having the fate of huge supply chains resting on the financial health of a few large companies, and especially in a sector of the economy riddled with poor payment practice.

“Countless small businesses working for Carillion have not been paid for months and are facing the prospect that they will not receive a penny for their hard work, products or services.

“It is unacceptable that the future of these businesses, and the jobs they provide, have been put in jeopardy by the reckless and irresponsible behaviour of one company. Government must take action now to ensure that this cannot happen again.

“Introducing protected project bank accounts, for all public projects, would ensure that money for work carried out would still be paid to those who have put in the hours and delivered on what they’ve been asked to do. It would also help stop the awful payment practices deployed by big businesses that squeeze smaller firms and put them risk.

“Carillion’s collapse is a watershed moment that cannot be ignored. Small businesses need to be given the confidence that a catastrophe of this scale cannot happen again.  Otherwise the post-Carillion legacy could be a public sector procurement programme that is small-business-free, further increasing costs and risks to the taxpayer.”

Professor Rudi Klein, SEC Group CEO, said that he was delighted that the FSB had come “on board”.

He added: “I would now like to see the government introduce legislation requiring PBAs to be used on all construction works over £1 million. Queensland in Australia has done this.  From 1 January 2018 this will happen on public sector works and from 1 January 2019 on private sector works.”

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.”