Beyond retentions: can the Commercial Payments Bill help transform construction's business model?

The Commercial Payments Bill aims to create fairer payment practices including through the ban on retention. But legislation only creates the conditions for change. The real opportunity is to use the bill as a catalyst for wider business model reform and a more resilient, productive and outcomes focused industry.

Retention is a safety net that we have stopped noticing, and if anything, it can encourage the entire project team – clients, advisers, contractors and sub-contractors to get things nearly right, to look the other way, and to rely on a pot of money for the defects that will inevitably arise if that mindset prevails.

The bill is currently passing through Parliament. The biggest headline for construction is the banning of retention but there is much else in it. With its primary aim to improve payment practices that build a stronger economy, the wider reform of procurement and commercial practices could allow the industry to go further – to invest in capacity, capability and innovation to drive improvements in the outcomes that we deliver.

The impetus for change

The context for change is longstanding. Sir Michael Latham had retention in his sights more than 30 years ago.

Retention treats the symptom of poor quality not the cause. Its removal forces industry to work on the causes of poor quality: incomplete or changing design, capability gaps, fragmented accountability, and programme and commercial pressure. The response must include clearer quality requirements, earlier and continuing assurance, better information and stronger accountability throughout design and delivery.

These solutions may all sound familiar. The Hackitt Review and Grenfell Inquiry shone a spotlight on the consequences of failing to put safety and quality first and have been a wake-up call to many. The Industry Safety Steering Group (ISSG), chaired by Dame Judith Hackitt to provide independent challenge and monitor the built environment sector’s progress on culture change, competence and building safety recently spelt it out more plainly: “retentions will continue to reinforce mistrust and perpetuate behaviours that undermine quality and safety.”

The government consultation highlighted that an estimated £229m of retention funds (in 2015 prices) is lost due to insolvency each year – this is largely money due for work completed. When insolvencies occur, they can have knock on effects through the supply chain and delay investment.

The Get It Right Initiative estimates that £25bn is wasted each year in dealing with construction errors

Meanwhile, the Get It Right Initiative estimates that £25bn is wasted each year in dealing with construction errors – much of the cost of which (like it or not) is ultimately being paid for by clients. Retentions can hardly be described as working satisfactorily for anybody.

Business models need to change

The bill - in and of itself - should not be considered the end that we have in mind. A sustainable industry should allow every capable business in the chain to earn a reasonable return for the value it creates and the risk that it carries.

The RLB Procurement Trends Report shows that client expectations continue to grow, from ESG to digitally enabled assets, the demands placed on our bricks and mortar increase year on year. At the same time, the operating environment for the supply chain is more complex and volatile.

Clients cannot expect more from the supply chain while expecting it to navigate increasing volatility in the same way. Fairer payment should not be considered a reward for better performance. Instead, it should provide the financial foundation from which capable businesses can invest in skills, productivity, capacity and digital capability. In return, clients should reasonably expect stronger performance, greater transparency and better outcomes.

The industry defaults to shedding risk to whoever doesn’t notice it or is least well equipped to sensibly negotiate an equitable position

The real challenge is in how risk is allocated, outcomes assured and value created across supply chains. The industry all too easily defaults to shedding risk and passing it on to whoever doesn’t notice it or is least well equipped to sensibly negotiate an equitable position.

The assurance of outcomes is where the hard work will need to be put in. We are accustomed to measuring inputs and the completed state of a building, but the outcomes emerge over time and may be difficult to measure. Translating that value creation into appropriate recognition back through the supply chain is harder still.

A catalyst for change

The Commercial Payments Bill is a legislative nudge in a better direction. Combined with wider reform, innovation could follow and result in some disruptive business models.

In the meantime, we know what is broken and we know which fixes work. It is the collaborative working practices, the alliancing, the risk sharing and earlier supply chain engagement. We have seen these approaches work, through demonstrator projects over decades from the likes of Constructing Excellence and Project 13 and it has even been codified into Constructing the Gold Standard and the Construction Playbooks.

The retention safety net may be going, but replacing it with another contractual stick would miss the opportunity. The Commercial Payments Bill should be the catalyst for wider reform: better allocation of risk, earlier and stronger quality assurance and proper recognition of value. Those changes, rather than the legislation alone, will determine whether the industry delivers better outcomes.

Paul Beeston is RLB’s Head of Industry and Service Insight and Construction Leadership Council Industry Sponsor for Business Model Reform.

Paul Beeston is RLB’s head of industry and service insight  and Construction Leadership Council industry sponsor for business model reform