Senior construction figures have hailed the government’s ban on retention payments but warned that work needs to be done to guard against “back-door loopholes”.
Today (24 March), the Department for Business and Trade (DBT) announced it will finally outlaw the use of retention payments – money withheld as security against defects or incomplete work – in construction contracts.
The move, which follows a consultation launched last year, aims to protect smaller firms from losing out, especially when upstream contractors become insolvent or refuse to release funds.
Iain McIlwee, chief executive of trade body the Finishes and Interiors Sector, told Construction News: “Payment issues and retention abuse have been a cancer at the core of construction.
“We’ve felt a bit like a broken record raising this issue and stating the obvious, but [without it] making an impact. It is frankly a relief to finally see this intervention.
“Our reality is that negative behaviours have become the norm, and the legislative lever is imperative. So we applaud the government for taking this stand and setting the wheels in motion for change.
“We appreciate this is not the end of all payment issues, but we do see it as the beginning of the end.”
The Electrical Contractors’ Association (ECA), which has long lobbied for reform, called for the industry to work together in an effort to ensure the ban is not circumvented.
ECA director of legal and policy Rob Driscoll said: “These measures will supercharge the supply chain, but the industry must come together and work to ensure there can be no back-door loopholes to get around the ban on retentions.”
The DBT has acknowledged that some firms might choose to ignore the legislation, but said this could be remedied through adjudication.
It also identified that higher-tier firms might attempt to evade the ban by adjusting payments, specifying them later in the project schedule.
“This circumvention risk is judged to be material but is not likely to outweigh the potential benefits to be gained through protecting retentions from insolvency and abuse,” the department said.
Rudi Klein, a barrister and former chief executive of the Specialist Engineering Contractors’ Group, said it was crucial for the legislation to be drafted carefully to anticipate non-compliance.
“The danger is that people try to avoid the impact by holding back money and calling it anything other than retentions. That is what they did in New Mexico, which is the only jurisdiction to completely ban retentions,” he told CN.
In New Mexico, “clients and main contractors were undervaluing the work as they went through the contract bit-by-bit, and loading more payments towards the end of the contract”, he noted.
However, Klein, who has campaigned on late-payment issues for years, welcomed the latest development.
“UK subcontractors will now be able to invest freed-up money into improving their services and products,” he said.
“There will be many clients that are concerned about the ban, but over time they will get a better deal.”
Mark London, senior partner and head of construction at law firm Devonshires, said that clients might look at alternative ways of protecting themselves against losses from defective work.
He said: “Employers may look to stricter notice requirements or liquidated and ascertained damages (LADs) as an immediate start.”
London added that larger firms could “simply end up coughing up a fine rather than losing their ability to apply pressure to contractors”.
In a joint statement from law firm Kennedys, Amanda Hanmore, partner, and Scott McKinnell, legal director, raised concerns that project costs could increase as a result of alternative payment security mechanisms, such as bonds being required.
“It could [also] result in employers adjusting cost schedules to provide for payments more loaded towards the end of a project,” they warned.
James Butcher, deputy chief executive of the National Federation of Builders, said poor payment practices had “hindered growth” and posed a “persistent challenge” to the industry.
“After years of tweaks without teeth and promises without action, this government has acted swiftly to announce measures that the industry has spent decades calling for,” he said.
Reacting to the announcement of the ban, James Talman, chief executive of roofing body NFRC, said: “This outcome is one our industry has been campaigning for years to achieve.
“For too long, specialist contractors have been forced to operate under a system that allowed larger firms to withhold their money, delay payment, and use their cash as free working capital.
“Today, the government has shown that it has listened, and we could not be more pleased.”
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Nicola Harley