What's Happening?
Construction industry bodies have expressed differing opinions on the future of retentions as the government’s consultation on late payments concluded on October 23. The consultation is part of Labour’s
initiative to implement the toughest late payment laws in the G7, aiming to address the economic impact of late payments, which cost the economy £11 billion annually and contribute to the closure of 38 businesses daily. The government has proposed two options for reform: an outright ban on retentions or new requirements for funds to be held in protected accounts or backed by guarantees. Build UK supports a full ban, arguing that retentions are problematic for all parties in the supply chain and that prohibition would lead to better payment practices and higher quality standards. The Construction Industry Council (CIC) also leans towards abolition but suggests a protected-account model as a beneficial compromise, warning that a ban could lead to new payment structures that might disadvantage smaller firms. The Electrical Contractors Association cautions that poorly drafted legislation could leave loopholes for retentions under different names and recommends an 18-month transition period with retentions held in protected funds.
Why It's Important?
The debate over retentions reform is significant as it addresses the broader issue of payment practices within the construction industry, which affects both large firms and SMEs. Late payments have a substantial economic impact, and reforming retentions could improve liquidity and financial stability for smaller firms. The differing views among industry bodies highlight the complexity of finding a solution that balances the interests of various stakeholders. A full ban on retentions could drive better payment practices and quality standards, but it also poses risks of unintended consequences, such as increased reliance on project bank accounts and performance bonds. The outcome of this consultation could set a precedent for payment practices in the construction industry, influencing future legislation and industry standards.
What's Next?
The Construction Leadership Council plans to write to ministers once the sector’s overall position becomes clearer, indicating ongoing discussions and potential further actions. Industry groups are united in supporting the removal of exemptions that allow payment terms to extend beyond 60 days, with some advocating for a 30-day maximum. The government will need to consider the feedback from various industry bodies and stakeholders to formulate legislation that effectively addresses late payments and retentions without causing adverse effects on smaller firms or investment risks. The consultation results could lead to significant changes in payment practices and financial models within the construction industry.
Beyond the Headlines
The debate over retentions reform also touches on ethical and legal dimensions, as it involves balancing the protection of smaller firms with the need for mechanisms that ensure defect-free building delivery. The potential shift towards protected accounts or guarantees could lead to long-term changes in how financial transactions are managed within the industry, promoting transparency and accountability. Additionally, the reform could influence cultural shifts in business practices, encouraging more equitable and timely payment systems that support the sustainability of smaller enterprises.
