Build UK, the Civil Engineering Contractors Association (CECA), and the Construction Products Association (CPA), are calling on Government to abolish the practice of retention in the construction industry
Together, Build UK, CECA and CPA represent the construction supply chain, from clients and the contracting suppliers. In their response to the Government consultation on the Practice of Cash Retention under Construction Contracts, which was submitted today, they make the case for a joint approach of Government legislation to abolish retention, supported by the industry developing and implementing on phased roadmap, as the only way to achieve the cultural change needed on this issue.
Cash retention – the withholding of a percentage of payment on construction work until it is certified as having been completed free of defects – is problematic for all parties with a significant impact upon cash flow and working capital throughout the supply chain.
These issues have been brought into stark focus this week with Carillion going into liquidation, leaving an estimated 30,000 creditors, which are predominately small and medium-sized businesses. It is also estimated that Carillion held £800 million of retention payments on entering liquidation.
In order to deliver the UK’s ambitious infrastructure, housing and commercial needs, the way construction projects are designed, procured, delivered and operated needs to be transformed. The current business model requires change with operating margins unsustainable for the level of risk that companies are taking on.
Build UK Chief Executive Suzannah Nichol MBE said: “The collapse of Carillion has reinforced the need for significant change in the construction industry, as we urge Government to take legislative action to abolish cash retention. The industry is ready to support this by implementing a phased approach to zero retention, in partnership with Governmet.”
The industry is fully committed to achieving zero cash retention and we believe that Government must introduce legislation to ensure there is zero cash retention within the industry by no later than 2025.
Alasdair Reisner, Chief Executive at CECA, said: “CECA has long supported the abolition of retentions. The use of improperly managed retentions by employers often has substantial impacts on SMEs further down the supply chain as these companies operate within extremely tight margins and reserves.
Carillion’s collapse has highlighted once and for all how change is needed in our industry. As a first step, we call on Government to legislate to abolish cash retentions and work with industry to implement an agreed route map based approach to achieve this ambition.”
This, supported by an industry-led roadmap would drive the cultural changes required to address the underlying issues of retention, while realising benefits for the industry, its clients and stakeholders:
- An increase in working capital within the supply chain to support investment, productivity and growth;
- Without the threat of unfair payment, there would be an incentive to improve quality of completed works on construction projects as well as increased assurance that any defects that did occur would be rectified appropriately; and
- Increased collaboration and transparency in the construction industry by ensuring that any forms of security used against defects would appropriate and proportionate.
Whilst committed to abolishing cash retention, Build UK, and CECA members recognise that alternative solutions must be identified and made available to the industry in order to provide security in the event of defects. Should Government choose to pursue a retention deposit scheme, we are committed to working with Government to design and develop a scheme to provide security retentions.
Dr Diana Montgomery, Chief Executive at CPA, said: “The industry clearly needs a sensible, ethical and common sense approach to this issue which works more fairly and efficiently for everyone involved. Perhaps more importantly however, the issue of retention is part of a larger issue of the reform required around construction procurement and delivery, which recent events have thrown into stark relief.”