Proposal part of series of measures unveiled by business secretary
The government has unveiled plans to abolish retentions in construction under a series of measures announced by the business department today.
It said the measures were part of the toughest crackdown on late payment in more than 25 years – since the 1998 Late Payment of Commercial Debt Act.
It said the Small Business Commissioner will be given sweeping new powers to investigate poor payment practices, adjudicate payment disputes, and fine the worst offenders – with penalties worth tens of millions for firms that persistently pay late or fail to comply with the new laws.
And in a statement, the Department for Business and Trade added: “We also propose to ban the withholding of retention payments under the terms of construction contracts, consulting on its implementation. This will prevent small firms losing retentions to insolvency or non-payment.”
How the industry has reacted
Mark London, senior partner and head of construction at law firm Devonshires
It’s the toughest crackdown in 25 years, but it will likely see other protections and mitigations emerge in response. Employers may look to stricter notice requirements or Liquidated and Ascertained Damages (LADs) as an immediate start.
There will also potentially be a rise in difficulties for employers getting contractors to rectify defects, without that same retention leverage.
The measures have been largely implemented to address the poor practices of larger businesses. But if the fines and investigations are not levelled sufficiently, the businesses who can afford it may simply end up coughing up a fine rather than losing their ability to apply pressure to contractors.
Dr David Crosthwaite, chief economist at BCIS
Retentions have traditionally played a role in managing defects liability and quality assurance, so any changes will need to ensure that appropriate mechanisms remain in place to maintain delivery standards.
There may also be scope to strengthen payment security further through mechanisms such as project bank accounts, which can support more reliable and timely distribution of funds across supply chains.
Melanie Leech, chief executive, British Property Federation
Retentions are a vital tool to ensure that buildings are built to safety and quality standards. We support reform to prevent genuinely unjustified late payments, but a complete ban on their use is a sledgehammer to crack a nut and will undermine the ability of those funding new construction to ensure that buildings are defect-free. This will particularly affect smaller or less experienced clients who will struggle to identify defects until it is too late and the builder is long gone.
Daniel Cashmore, partner at law firm Osborne Clarke
The ban will grab headlines as the government is seen to be supporting small businesses, which make up the backbone of the construction industry. The reality is that retention payments are used as an important safeguard against SME insolvency as well as a commercial tool to ensure works are completed and issues / problems are rectified promptly and without the need for legal proceedings. A ban on retention payments may lead to more disputes as large organisations are left having to seek recourse for incomplete or defective works via the courts or adjudication, which they would have recovered via the retention pot.
David Frise, chief executive, BESA
This is a landmark moment for our industry and a hugely significant step forward for BESA members and the wider building services engineering sector. We have been campaigning for many years to end the unfair and outdated practice of retentions, which has placed an unacceptable financial burden on specialist contractors. The government has listened to the concerns of our members and the wider industry. This decision has the potential to transform cashflow, improve business resilience, and create a fairer, more sustainable supply chain.
Amanda Hanmore, partner at law firm Kennedys
It must come as good news for the industry, which has suffered from late payment issues for very many years.
That said, it may provoke disputes in relation to payment practices and what can constitute withholding of retentions while new compliant practices become established.
It may also increase the costs of some projects as a result of alternative payment security mechanisms such as bonds being required or result in employers adjusting payment schedules to provide for payments more loaded towards the end of a project.
The new measures are also likely to lead to radical changes in standard form construction contracts.
A welcome move to outlaw retentions directly
The Construction Leadership Council has campaigned since at least 2019 to bring an end to the practice of retention payments across the sector, writes Mark Reynolds.
For smaller firms up and down the country, late or non-payment of retentions is one of the primary risks that can lead to insolvency. The current status quo drives instability and restricts much-needed investment in the industry.
Over the past half a decade, industry and clients have been unable to agree how to move away from retentions and so it is welcome that government has decided to intervene directly to outlaw them entirely.
The vast majority of construction businesses in the UK are small-to-medium sized enterprises and will also benefit from the broader package of measures on payment announced today, which will help to establish a fairer enforcement regime and more transparency around payment terms.
The CLC will continue to work closely with the Department for Business and Trade as they develop the timeline and process for implementing this package of measures. The abolition of retentions will be a substantial change to how we operate. We recognise that both clients and the supply chain will need time to adapt and establish alternatives that effectively incentivise high-quality work and limit defects in construction.
Mark Reynolds is executive chairman of Mace Group and CLC co-chair
The changes will include a new 60-day cap on payment terms on all large firms when paying smaller suppliers. New mandatory interest on late payments will also be introduced, with a requirement for all commercial contracts to include statutory interest set at 8% above the Bank of England base rate.
Business secretary Peter Kyle said: “Far too many businesses are forced to shut down because they have not been paid – that is simply unacceptable.
“We are unveiling the strongest, most robust changes to payment laws in over a generation – laws that will transform the fortunes of small businesses for years to come and make their day to day lives much easier.”
Under the proposals, which will be subject to consultation, boards or audit committees of persistently late-paying large companies will also be required to publish explanations for poor payment performance and the actions they are taking to address it.
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