Abuse of the cash retention system has hurt SMEs for too long. The proposed statutory deposit scheme could change all that – so let’s respond to the consultation and make our voices heard
Cash retention in the construction industry is a scourge that causes bankruptcies, loses jobs and reduces training […] Cash retention is like an underground poker game.”
These words were spoken by Baroness Donaghy a couple of years ago in a House of Lords debate on retentions initiated by cross-bench peer Lord Aberdare. The debate was prompted by an amendment – inspired by the Specialist Engineering Contractors’ Group – to the (then) Enterprise Bill. This amendment required the government to review the cash retention system to come up with the most effective method for securing the monies (and then legislate to implement it).
A statutory retention deposit scheme […] is the only effective option that would help overcome the abuse (the late and non-payment of retentions) and the non-payment due to insolvencies
The government agreed to review the system and, much later than promised, the Department for Business, Innovation and Skills has published its review and is consulting on the best way forward. The consultation document contains 57 questions, and I suspect that very few firms would be keen to answer every one (assuming they could).
The department is consulting on three policy options:
- Option 0: do nothing
- Option 1: improve awareness of existing statutory requirements
- Option 2: create a retention deposit scheme.
These options have been informed by a considerable amount of research carried out by consultant Pye Tait.
Option 0 appears to have been discounted, since existing measures to improve payment performance do not directly deal with cash retentions.
Option 1 is included because the Pye Tait research indicated that some firms are not asserting their rights under the Construction Act. The amended act outlaws clauses that make payments (such as retentions) conditional on the performance of obligations (or the issue of a certificate) under another contract. But making firms aware of their rights in this context is unlikely to end retention abuse, which the Pye Tait research revealed to be widespread.
Neither would it deal with the scandalous loss of £229m (at 2015 prices) worth of retentions per year due to upstream insolvencies. Even worse was the £7.8bn of retentions that were not paid when due for release, over a three-year period, according to the research. This represents a massive drain on the resources of the industry’s SMEs. For this reason alone, legislation is necessary to ringfence the monies withheld as retentions.
Retentions are a source of free credit which, over the long term, have impaired the growth and productivity of SMEs. They have also contributed to undermining trust and teamwork in the industry
Option 3 – a statutory retention deposit scheme – is the only effective option that would help overcome the abuse (the late and non-payment of retentions) and the non-payment due to insolvencies.
According to the impact assessment contained in the consultation document: “The total combined benefit to construction contractors from having their retention money protected and paid to them in the event of upstream insolvency would therefore be an estimated £229m per year. This provides a 10-year [present value] of approximately £1967m.”
Every SME in the construction industry should respond to this consultation, if only to confirm that a statutory retention deposit scheme is the solution. This could be introduced by way of a simple amendment to the Construction Act, although more detailed regulations may be required to govern the operation of the scheme. An existing model is the tenancy deposit schemes introduced under section 215 of the Housing Act 2014, whereby deposits provided by shorthold tenants must be deposited in a government approved scheme.
Anyone requiring a cash retention should have to deposit it in an approved scheme. Failure to do so would render void the clause imposing the retention. They would have to be registered with scheme, and the party from whom monies were withheld would have to be notified by the scheme. The scheme could be operated by a commercial outfit or a not-for-profit organisation.
The business department is concerned about the cost of such scheme. One of the government approved tenancy schemes – the aptly named Tenancy Deposit Scheme – pays for itself out of the interest earned on the deposits. Any profits go to a charity providing training in the rented sector.
The department also asks whether such a deposit scheme should only apply to contracts above a certain value. The answer should be a definite “no”.
We must press on with this measure and ensure the necessary legislation is passed in this parliament. The department acknowledges that retentions are a source of free credit which, over the long term, have impaired the growth and productivity of SMEs. They have also contributed to undermining trust and teamwork in the industry. For thousands of SMEs in construction, now is your chance to respond to this consultation to end the scourge of retention abuse. The consultation closes on 19 January 2018.
Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors’ Group