Parliamentary body says government must now act to punish late payments in its supply chains, while introducing mandatory independent mechanisms to hold and manage retentions
Parliament’s Business, Energy and Industrial Strategy (BEIS) Committee has urged the government to bring forward proposals to introduce mandatory project accounts with a mechanism to independently release cash retentions owed to contractors.
A new report from the committee into small businesses and productivity was critical of existing efforts to combat both late payments and the abuse of existing retentions systems, particularly in light of the collapse of Carillion that has seen building services specialists losing large amounts of money.
Addressing the issues of retentions and late payments have been the focus of an ongoing campaign for a range of industry bodies such as BESA, the ECA and the Specialist Engineering Contractors’ (SEC) Group that have been pushing for regulatory reform. The same organisations have also supported MP Peter Aldous in introducing proposed regulation to parliament back in January that seeks to make the use of third part deposit schemes for holding retentions as a legal necessity.
It is in this environment that the BEIS Committee’s report looked at concerns around payment practices in sectors such as construction and found that the introduction of independently managed project accounts for holding retentions would be a significant step to prevent future abuse.
However, current inaction within government on committing to such a proposal was a major source of concern in the findings.
The committee said, “The government is currently sitting on a review of this issue and we found the minister’s stance that a lack of consensus was holding up progress disappointing.”
“We recommend that the government should bring forward proposals as soon as possible to introduce compulsory project accounts so that retention money can be held independently and its release subject to fair and timely oversight.”
The report noted that the principle of withholding retentions was necessary to ensure contractual responsibilities were being fulfilled in construction projects. However, the level of abuse of the system was a major concern, specifically from big companies that were increasingly building the practice of withholding retentions payments for as long as possible for financial gain into their business models.
The report said the significant damage to the supply chain from delayed and withheld retentions that were owed to contractors was highlighted even further by the liquidation of Carillion in January.
Prompt payment revamp
Late payment was another area of concern highlighted in the report that was found to adversely affect growth of UK SMEs as well as overall industry productivity.
The report said, “As we found with Carillion, late payments are built into the business models of too many companies, leading to many SMEs losing staff, profits and their businesses. This is totally unacceptable, unfair and constitutes a particularly disgraceful form of market abuse.”
The committee once again called on government to take immediate action by granting the recently created position of Small Business Commissioner with new powers to fine companies found to be paying late. This would also require expanding the remit of the same commissioner to include the construction sector.
Both BESA and the ECA, which have been campaigning for a number of years to make it mandatory for retentions to be held in accredited deposit schemes, welcomed the committee’s calls concerning payment reforms.
BESA policy manager Alexi Ozioro said that the latest report highlighted the growing political momentum to ensure fairer payment practices. He also cited the Cabinet Office’s announcement last week that it would next autumn consider backlisting companies with poor payment records from winning government contracts as a positive development.
Mr Ozioro said, “This highly influential report from the BEIS Select Committee and the Cabinet Office’s intervention are highly significant especially with the anniversary of Carillion just a month away. This reflects growing political pressure to address behaviour that is not just morally wrong, but is also bad for the UK economy by putting perfectly good businesses at risk of insolvency.”
“Connecting fair payment to procurement is a powerful statement from government, and a very welcome development.”
Rob Driscoll, deputy director of policy and practice with the ECA, also praised the work of a Cabinet Office-established SME panel that had worked with civil servants to try and improve support for SMEs looking to work in the public sector.
He said, “These developments represent a significant milestone in the government realising its role as a responsible client in the post-Carillion era. They should be applauded.”