The Bill's aim is to alleviate the problem surrounding retentions where, due to the current system in place, according to government statistics, around £220 million is lost by UK business each year.
The purpose of retention is quite simple: 5 to 10% of the overall contract moneys in a Construction contract is held as security in case a firm fails to return to rectify snagging. This amount should then be returned after a period of 12 months. However, the issue appears to be that this money is at times withheld for longer periods - often upwards of three years. Many believe this money is withheld for reasons such as to bolster the working capital of the group withholding them.
For SMEs, a delay in receiving retentions can have a critical effect on their cash flow. This can restrict them from taking on new business, investing in new equipment and facilities, and prevent further recruitment. Of greater concern are the cases where the retained cash has been lost to upstream insolvency, with an average loss per contract estimated to be £79,900. For SMEs this is a considerable amount of cash flow that can make all the difference.
What the Bill proposes to do is ring-fence cash retentions so as to ensure the money is not held for longer than is required, and that it is not lost to insolvency - a sensible approach that one would assume would have been implemented long ago. In fact, this was a recommendation in a 1994 report, produced by the late Sir Michael Latham, commissioned by the government. This report led to the passing of Part 2 of the Housing Grants, Construction and Regeneration Act 1996 (odd then that this is one of the only recommendations left unenforced).
In Peter Aldous's submission to the house, he advised the solution is one that requires legislation. If carried, the Bill would amend the Construction Act to require the Secretary of State to introduce regulations to protect retentions.
What would this new system look like? Mr Aldous drew comparison to shorthold tenancy deposits where a scheme has been in place for some time whereby deposit money must be held in a government-approved scheme. He believes this will equally work in the construction industry for cash retentions.
The proposed new scheme would ensure that cash retentions are secure and available for release at the time they are due to be released. One would find little wrong with this methodology. This would restrict businesses attempts to withhold money for their own benefit and ensure contractors can guarantee their cash flow as of a certain date. A positive for those downstream contractors is they can then use this guarantee as security for a loan from a bank.
Whilst some may question the feasibility of such a scheme as the one proposed by Peter Aldous, it appears he had an adequate answer to that as well. Like the deposit scheme, this would be a self funded operation whereby the interest accumulated by the funds held in the scheme would be used to pay for its up-keeping. Furthermore, the comparative tenancy deposit scheme actually makes a profit, with the surplus being donated to charities within that industry. This may also be possible in the construction industry: profits could be used as a fund for training.
As the Government's continuous aim is to promote the growth and prosperity of businesses in the United Kingdom, and given that SMEs account for 99% of UK business, I would tend to agree with Peter Aldous that this Bill would help secure that objective. However, I would go further by saying that it would be almost negligent to leave this problem unaddressed as it appears the smaller the business is the harder they are hit by the delay and loss of cash retentions.
The Bill passed the first stage and the second reading will take place on 27 April 2018.
If you have any queries on the operation of retention, or recovery of sums owed, please do contact a member of the construction team.