What's Happening?
The construction industry is urging the government to address late payments and retentions, which are seen as significant constraints on liquidity across the supply chain. The Construction Leadership Council has consistently advocated for more government action
on these issues, which impact firms at all levels. A recent consultation by the government aims to introduce the toughest late payment laws in the G7, potentially leading to significant legislative reforms. The consultation proposes two options for retentions: an outright ban or new requirements for retentions to be protected in a separate bank account or through a guarantee. Industry groups like Build UK and the Construction Industry Council have expressed support for these measures, highlighting the negative impact of late and non-payment of retentions on cash flow throughout the supply chain.
Why It's Important?
Addressing late payments and retentions is crucial for improving financial liquidity in the construction industry, which is vital for the health of the broader economy. Late payments cost the UK economy billions annually and push numerous businesses into insolvency. By reforming these practices, the government aims to enhance the financial stability of construction firms, particularly small and medium-sized enterprises (SMEs), which are disproportionately affected. The proposed changes could lead to a more equitable payment system, encouraging higher-quality construction and reducing investment risks. However, some industry stakeholders warn of potential loopholes and unintended consequences, emphasizing the need for clear and robust legislation.
What's Next?
The government will assess the results of the latest consultation, which closed recently, before making any changes. Industry groups are lobbying for specific measures, such as a ban on retentions or protection of retentions in separate accounts. The Electrical Contractors’ Association suggests a transition period of no more than 18 months for the industry to adjust to a ban. The government is also considering reducing the maximum payment term from 60 days to 45 days, subject to further consultation. The Construction Leadership Council plans to write to ministers once there is a clearer view of the sector’s response, working closely with the department on implementing the proposed measures.
Beyond the Headlines
The potential abolition of retentions could lead to a reconfiguration of payment terms, with lower payment rates and additional bonuses. This shift may impact investor appetite and disadvantage smaller clients. The British Property Federation warns that banning retentions could increase investment risk and affect the delivery of defect-free buildings. The industry must monitor the impact of these changes to ensure they do not lead to unintended consequences, such as disadvantaging SMEs or creating alternative methods of delaying payment.
