More On Retentions – Lets Put An End To Them

Much has been written about how and why Carillion failed and this has highlighted the perennial, but as yet unresolved, issues of retentions and extended payment terms.

Everyone who works for the outsourcing and construction sectors knows exactly who the bad payers are and we all wince at their bare-faced lies about ‘working in partnership with our supply chain’ as they continue to use SME subbies and suppliers as banks.

They impose ‘accept this or we go elsewhere’ 90 days, sometimes 120+ days payment terms, along with impenetrable purchase ledger departments and even schemes that actually require the supplier pay a premium for the privilege of having their own money sooner!

With several months’ worth of their cash still sat in the coffers of the client business (if, indeed, they actually have the cash!), the risk of failure to many otherwise perfectly sound small businesses is massively increased, as is the magnitude of any bad debt they should encounter like many of the unfortunate firms who supplied Carillion.

Late last year, speaking on behalf of Labour’s front bench business team, MP Bill Esterson said he was appalled by the statistics recently released as part of the research carried out by the government: “Over a three year period the industry – primarily SMEs – has lost £700 million worth of retention monies because of upstream insolvencies.  This works out at almost £20m per month, £4.5m per week and £900,000 per working day!”

He added: “For an industry (that mainly comprises SMEs) to regularly haemorrhage this amount of cash is truly shocking.  It amounts to a massive drag on a key sector which, at the same time, is being encouraged by this Government to invest in cutting-edge digital and manufacturing technologies.”

There is, however, hope on the horizon for struggling subbies. The First Reading of the Construction (Retention Deposit Schemes) Bill took place in the House of Commons this January. The Bill, introduced by Peter Aldous MP with 11 sponsors drawn from all parties, is designed to provide security for cash retentions so that they are protected against insolvencies of parties up the supply chain.

Among the Bill’s provisions is a statutory obligation on any party withholding cash retentions to place them in a retention deposit scheme. Failure to deposit monies in a retention scheme will render invalid any contract clause enabling the withholding of cash retentions.

This legislation has the potential to end, once and for all, the appalling bad payment practice inflicted by too many larger businesses on smaller ones. It’s been a long time coming – let us hope it is successfully enacted.