What’s wrong with retention in construction?

By Catriona Lingwood, Chief Executive of Constructing Excellence in the North East

This week, the new construction minister, Andrew Stephenson, supported a crackdown on poor payment, saying that the government needs to look at restricting the use of retention.

Retentions are when an agreed percentage of payment is withheld from the contractor. The money builds throughout the project and half of the retention is usually paid on completion, with the remaining balance being paid 12 months later when any defects have been corrected. Retentions give the employer security and encourages the contractor to rectify any problems. However, for years there have been concerns over the misuse of retentions, which has had a huge impact mostly on smaller firms.

A delay in payment means the smaller firms down the project chain suffer, as they have to wait even longer to be paid. Retentions restrict cashflow and lead to a waste in valuable resource and time, often spent chasing for payments – all of which can result in a business becoming insolvent. It’s not fair that the smaller firms are penalised for being a small but that’s what tends to happen – the smaller the firm, the harder it is hit.

Earlier in the year things were finally looking up for the smaller businesses. The government announced that from September, firms that don’t pay at least 95% of undisputed invoices within 60 days face being barred from public sector contracts worth more than £5m, this will ensure the government only does business with companies who pay their suppliers on time, many of which are small businesses – finally a step in the right direction, but is it enough?

Last week at our Construction Leadership event, Andy Mitchell, co-chair of the Construction Leadership Council also stressed that the industry needs to stand up and tell the government how they can support the industry and that includes clamping down on retention clauses and fair payment. The change in payment practices goes beyond reducing the payment time, we need to be naming and shaming those who aren’t paying on time and holding them to account for what they’re doing to the industry and supply chain. There is currently no requirement for the retention fund to be protected, so if the holder of the fund becomes insolvent then the money becomes part of a general pot of money available to creditors. The lack of protection has affected around 44% of contractors who have suffered non-payment over the last three years. When big contractors fail, such as Carillion, there’s a huge knock on effect for most of the industry, with many being businesses at risk of being left out of pocket. We must reduce the likelihood of this happening, so something needs to change.

Finance is a huge problem for our industry and one I don’t think we’ve taken seriously enough in the past. It wouldn’t be accepted in any other industry, so why should ours be any different?

For more information on Constructing Excellence in the North East, please contact chief executive, Catriona Lingwood, on 0191 500 7880 or email catriona@cene.org.uk.