End of retentions close on Crossrail

London’s Crossrail project looks set to herald the implementation of a scheme which would ensure timely payments to contractors and an end to retention clauses on government contracts.

Project banking, where cash is paid into an account then distributed to each of the sub-contractors rather than direct to the lead contractor, has been mooted as the payment structure for the project.

Rudi Klein SEC Group chief executive said officials in the department for transport were close to agreeing on the minutia of the details and would be making a statement on the payment structure before the end of the year.

The scheme is yet to be agreed in full but, if given the go-ahead, Crossrail could prove the tipping point for an overhaul in the way contractors are paid across the public sector.

The Department for Transport would not confirm that Crossrail would be financed in this way. But the Select Committee on Business and Enterprise championed project banking in this month’s Construction Matters report, urging Central Government procurers to, “make use of project bank accounts where practicable and cost-effective.” Barclays and Bank of Scotland already have accounts in place in anticipation.

Klein said the scheme would end the incentive for lead-contractors to hold on to cash to earn interest. “For some lead-contractors between a quarter and a third of their turnover comes from interest payments on retentions,” he said.

The Highways Agency and Defence Estates, which between them are responsible for £5bn of contracts a year, have put themselves in the vanguard of facilitating better payment terms for sub-contractors, by scrapping retentions for procurement projects.

But both have failed to prevent the application of retentions down the supply chain, where the incentive to retain cash in order to earn interest remains just as strong.

Geraldine Samuelson-Brown, Bsria, principal research consultant, said retentions warped the best practice of integrated project management, and added cost to projects by forcing sub-contractors to price-in the risk of parts of the supply chain going bust.

“There should be trust,” she said. “Really the margins for M&E contractors is not big and they are not getting a fair deal.”

The Select Committee backed the Bsria stance urging government departments to scrap retentions as early as possible.

It said: “The practice of holding a retention against contractors as an insurance against defects undermines efforts to promote team-working and integrated supply chains in the construction industry. It also damages the cash-flow of smaller sub-contractors and reduces investment in training and innovation.”