MPs hear of ‘human cost’ attached to loss of cash retentions

Alan Brown MP
Alan Brown MP

The case for the introduction of a Bill to safeguard and release cash retentions in the construction industry was made to MPs at Westminster yesterday.

In a Motion debate in the House of Commons, Alan Brown MP said unprotected cash retentions should not exist in the 21st century and described the human loss attached to the practice.

Mr Brown said: “A cash retention is the deduction of a portion of an agreed value of a contract—in effect, a cash bond. That cash is withheld by the main contractor to cover any snagging defects in an agreed maintenance period of one or two years.

“Usually the subcontractor will remedy defects at their own cost, as per the contractual terms and conditions, thereby with the expectation of the retention being released promptly at the end of the contract period. That is where problems arise, when the retentions are not released in a timely manner, for various reasons—even worse, they may not be released at all.”

Highlighting how the practice puts construction SMEs at risk, he said: “The most common reason for non-release is a company going into liquidation, and so, for example, a Wirral-based company lost £240,000 over a five- year period due to insolvencies. A Scottish plumbing firm has lost £150,000 of retentions over five years, which is a huge amount for a small or medium-sized enterprise (SME).

“We must also bear in mind that Scottish plumbers have also been hit by the Pensions Act 1995, with the section 75 multi-employer pension debt issue. Some company owners are already at risk of personal insolvency, so the retentions issue is just another distraction that is not required.

“One SME steelwork contractor with an annual turnover of £3 million has retentions of £150,000, which is 0.5% of turnover. Given how low profit margins can be at the downstream end of the construction industry, that is a considerable sum.”

Having worked in the construction industry, Mr Brown said he understands the origins of the retention system and appreciates how hard it sometimes can be to get a subcontractor back on site to address snagging issues.

He said: “The reason for that is often that they have moved on to another job and so the resources are not immediately available. That said, it is seldom that subcontractors would not fulfil their obligations, and so when they do so they expect the money to be released when it is due to them. If they comply, why should they not receive the money in a timely manner?”

Arguing that the loss of cash retentions comes with a human loss attached, Mr Brown said: According to the then Department for Business, Innovation and Skills, a survey of SMEs found 25% stating that a debt of ‘£20,000 or less is enough to jeopardise their business prospects’.

“As I have highlighted, retention losses are often much higher than £20,000, which means: thousands of jobs lost or facing an uncertain future; fewer opportunities to recruit new apprentices and for companies to invest in training; and a risk of individual bankruptcies following calls by banks on directors’ personal guarantees to pay off loans.”

Clearing up the issue will not only help improve the UK’s “productivity problem”, in terms not just of the man hours saved through not having to chase up the retentions, but will release money for investment in new equipment or job creation, Mr Brown argued.

He said that almost £50m-worth of retentions were lost by small firms in 2015 alone due to insolvencies up the supply chain, with approximately £3 billion-worth of retention moneys are withheld at any one time.

As Mr Brown pointed out, the issue of cash retentions is not a recent phenomenon. The Banwell report, prepared for a government 53 years ago, recommended the abolition of retentions, and 23 years ago the Latham report, a joint construction industry and government report, recommended that cash retentions should be at least protected in a trust account.

He said: “We operate a tenancy deposit scheme to protect individuals in the private renting sector, yet for some reason there has still been no will on the part of governments to do something with these construction ‘deposits’.

“In 2002 and 2008, the business Select Committee recommended phasing out cash retentions because they were outdated and unfair to small firms. When this issue was raised in a debate in Westminster Hall in January 2016, the Minister confirmed that there would be an evidence-based review, to be completed by the end of that year.

“Here we are in April 2017, the process has been kicked back all this year and now we have a general election, which will cause further delay. We are not just in long grass, but in long grass growing out of a sea of mud. Worse still, it is rumoured that the consultation which has been completed will be consulted on again, so we can now assume that any new government will not move on this until after the summer recess. I plead for consideration of suitable secondary legislation to be enacted early in the new Session, whoever the new government may be.”

Mr Brown paid tribute to the Specialist Engineering Contractors Group (SEC Group), the Scottish and Northern Ireland Plumbing Employers Federation (SNIPEF), the National Federation of Roofing Contractors and the Builders Merchants Federation for being proactive in raising these matters.

He suggested that a ‘Project Bank Accounts’ system, operated by the Scottish Government to ensure subcontractors get paid on time when the government pays the main contractor could be adapted to include retentions, though the tenancy deposit scheme is the model that should be adopted.

Retention moneys are ring-fenced in separate accounts, in compliance with legislation, in countries such as the United States, Australia, New Zealand and certain EU member states.