A leading builder has criticised the system of payment retentions. Welcome to our world. There is something ironic about a major housebuilder railing against this injustice, when it holds retentions against its own supply-chain SMEs.
John Tutte, executive chair of Redrow, said it was “ridiculous” his firm might be subjected to buyer retentions to make sure it went back to fix defects on new homes, including scratched doors and wobbly handrails.
SMEs are being forced out of business because they have not been paid fairly or on time
“Stuff happens” was his defence – and he is right. There is a lot of pretty serious stuff happening in our industry, including SMEs being forced out of business because they have not been paid fairly or on time. Almost two years on from the Carillion debacle, perfectly sound businesses that do perfectly good work are struggling to survive.
About £10.5bn is being held in retentions from SME contractors at any one time, choking off their ability to invest in jobs and growth. An estimated £7.8bn in owed retentions has gone unpaid in construction over the past three years, and in the same period £700m was lost because the firms hanging on to all that SME cash went bust.
The government has an important role here. It can enforce fairness on those that do not behave fairly – and the industry has presented it with a solution. The Aldous bill, which has been before our now paralysed parliament for nearly two years, calls for a simple but key reform: to hold retentions in a statutory deposit scheme rather than in a client or main contractor’s bank account. A similar scheme is already in force in Australia.
Reforming retentions would be a good way for the government to show it is truly standing up for the interests of SMEs after Brexit.
Redrow’s rival Persimmon has introduced retention for buyers, allowing them to withhold a final payment until defects are put right, but it is this kind of scheme that Mr Tutte labelled “ridiculous”.
Does he feel the same about the retentions Redrow holds against its own subcontractors? Is it not equally ridiculous that, having completed their work as instructed, they have to wait months to receive 100% of their due payment?
The retentions culture forces smaller firms to act as lenders to larger ones by, in effect, bankrolling their projects and inflating their profits. The average 10% retention more often than not represents a small contractor’s potential profit on a job.
Poor payment practices have major effects on our society. This is why the BESA and the ECA have set up a survey with the Prompt Payment Directory to capture information about the wider impact of late payment on mental health and business wellbeing.
The survey is supported by 27 construction bodies that form a coalition determined to persuade the government to reform retentions.
Withholding money feeds the doubts of potential investors who view the sector as too risky. This has a knock-on effect on society, the wider economy, the ability of people to buy new homes… and large businesses such as Redrow.
David Frise is chief executive of the Building Engineering Services Association