More and more decent contractors are opting out of tricky public projects. If the government wants us back to build its Olympics, it’ll just have to outlaw retentions
Sir Michael Latham recognised that the two vital ingredients of successful businesses – confidence and finance – were in short supply in traditional construction. Accordingly, the 1993 preparatory discussion document to his Constructing the Team report was entitled Trust and Money.
Constructing the Team addressed the trust issue through partnering, later taken on by Sir John Egan’s Rethinking Construction as integration and lovey-dovey supply-chain management.
Latham’s answer to the money side was the Construction Act, which eventually changed pay-when-paid clauses to pay-when-certified and gave us adjudication, but failed to deal with the widespread abuse of retentions. Regrettably, the Construction Act has not been a great success for constructors. The Technology and Construction Court has already taken on five more senior judges to deal with the expected flood of Olympics disputes. The only sector of the industry to have gained more money from adjudication is construction law.
The Movement for Innovation persuaded constructors to accept change to improve the service to customers, with promises of increased margins plus better management and payment conditions for all. But that hasn’t worked either. Only those at the top of the supply chain have benefited.
Some quotes from the Building article “Blood and money” (2 September) graphically illustrate the scale of the problem for small and medium-sized real constructors: “Retentions outweigh our profit”; “We were paid £500,000 less than we were due”; “£950,000 of my money is held in retentions”.
Retentions force those at the bottom of the supply chain to finance anything up to 10% of the project with their retained overhead and profit margins while unconnected people at the top, earning top fees and salaries, stretch out the final account negotiations for years. The supervisors are creaming off the constructors’ equitable profit entitlement to keep us down, working at cost.
Contractual retentions are of course only the public face of a much more serious malaise that blights construction’s reputation. That is the practice of delaying and disputing payments throughout the supply chain, assumed by many people to be the normal way of doing business. It is all so wasteful and distracting and unnecessary. The malaise could be cured by appropriate amendments to the Construction Act but the current proposals appear (to a legal layman like me) to be quite inadequate.
Clients can’t profit from retentions that penalise the most important people in the process
Rudi Klein argues that all conditional payment provisions be outlawed (30 September).
It is a great idea but would only work on design-and-build contracts with guaranteed pre-agreed stage payments with no variations and where the principal contractor is directly responsible to the client. Bad payment practices are a direct result of the industry’s adversarial supervised contracts. Unconditional payment provisions won’t work with them. There are far too many people interfering in the valuation, certification and payment processes. All constructors should concentrate on getting rid of retentions as a first step.
If government is to retain any credibility, it should amend the Construction Act to outlaw contractual retentions at all levels, from clients and funders downwards. Our clients, including the government, will have to accept that if we are to reform construction for their benefit, they can no longer profit from bad payment practices such as retentions that penalise the most important people in the process – the constructors.
More and more constructors are moving away from the adversarial public sector and concentrating on private commercial work. Commercial clients can make quick decisions based on pure economic factors without the bureaucracy and political fudge that comes from government spin masters. They can also settle final accounts in weeks rather than years.
Outlawing retentions through the Construction Act could attract some constructors back, and become a significant factor in the success of the increasingly politicised Olympic construction project.
Colin Harding is chairman of Bournemouth-based contractor George & Harding