After Carillion, an effort to re-write the law around construction payments is gaining momentum
In early January, low-profile backbench Conservative MP Peter Aldous rose in a sparsely-populated House of Commons to propose a Private Members' Bill – the typically doomed effort that a humble MP can make to try and get new law on the statute book.
Aldous' short speech on a technical industry point made few ripples at the time, and he could count upon the support of only around a dozen of his fellow parliamentarians.
Fast forward to today and Aldous' bill – now known as the Construction (Retention Deposit Schemes) Bill 2018 – has the backing of 120 MPs and 76 industry bodies representing more than 330,000 businesses across the United Kingdom.
The bill seeks to reform the regime around retentions under construction contracts. Retentions are the sums - typically between 3 and 10 per cent of a contract's value - held back by a party employing a contractor or a subcontractor as security against incomplete or defective work. These are typically designed to be returned in full a year after a project's completion.
The reason for the sudden groundswell of support around Aldous' efforts can be summed up in a single word: Carillion. When that firm – the UK's second-largest construction business – buckled under the weight of its debts just days after Aldous' initial speech in the Commons, the vulnerability of scores of its subcontractors awaiting payments that likely would never come was suddenly headline news.
Aldous' cause now attracts cross-party support. Any proposal which has the backing of members of the Labour Party, the Liberal Democrats, the SNP, the DUP, the Green Party, Plaid Cymru and the Conservatives in today's fractured political landscape likely has much to recommend it.
If it becomes law, the Construction (Retention Deposit Schemes) Bill will amend Part II of the Housing Grants, Construction and Regeneration Act 1996 – commonly known throughout the industry as the Construction Act.
New sections 111A and 111B provide for cash retentions under construction contracts to be held in a mandatory retention deposit scheme. Such a move would safeguard sums due to subcontractors by having them held by a government-approved third party. In the event that the industry suffers another Carillion-style collapse, subcontractors could rest easy in the knowledge that retentions due to them at the conclusion of a project will not disappear upon their employer's liquidation.
There are plenty who would welcome the adoption of the bill – government-commissioned research puts the annual value of unpaid retentions in the construction sector in the billions. Smaller firms increasingly view the sums withheld from them by Tier 1 construction firms as an attempt to boost the larger entity's cash flow rather than serve any more noble purpose. A significant 44 per cent of contractors who had sums retained under a contract in recent years report non-payment of monies due to them due to an insolvency further up the contractual chain.
The effect of such defaults, or even delays, in returning retentions is potentially ruinous for smaller firms – depriving them of funds to invest in equipment and expansion, or even just to meet their costs.
Some question whether the application of the mandatory 'retention deposit schemes' envisaged by the Private Members' Bill will really make a big difference to the industry – citing the fact that many contracts operate without any retentions and that the new regime could have prohibitive administrative costs.
However, supporters reply that in the housing sector, deposits for short-hold tenancies are already placed in a similar Government-approved scheme - one which effectively pays for itself through the interest earned on these deposits.
Private Members' Bills rarely become law. But in the post-Carillion landscape, Aldous' effort has a fairer wind than most.
The MP couldn't have known Carillion was days from collapse when he addressed the Commons in January. But he presciently noted at the time that "the abuse of retentions has a negative knock-on domino effect that cascades through the construction industry".
Events would bear that out in the days that followed. Lawmakers would do well to take steps to ensure it can't happen on such a scale again.
For any questions regarding this article please get in touch with Mark Summers from our construction team.
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