Enterprise Bill [HL]

Lord Aberdare Excerpts

Wednesday 28th October 2015 Grand Committee

Moved by

[Lord Aberdare (CB)]

39: After Clause 12, insert the following new Clause—
“Payment practices: protection of retention monies in the construction industry
(1) The Secretary of State shall arrange a review of the practice in the construction industry of withholding monies which would otherwise be due under a contract, the effect of which is to provide the paying party with security for the current and future performance by the party carrying out construction operations of any or all of the latter’s obligations under the contract (“retention monies”).
(2) The review shall make recommendations regarding—
(a) the maximum period of time for which retention monies can be withheld; and(b) the most effective mechanism for protecting retention monies against the risk of the paying party becoming insolvent. (3) The review shall be completed by the end of the period of 9 months beginning with the day on which this Act is passed.
(4) On completion of the review the Secretary of State shall lay a copy of the report of the review before each House of Parliament.
(5) Within the period of 18 months following completion of the review the Secretary of State shall by regulations implement the recommendations in the review.”

[Lord Aberdare (CB)]

My Lords, I listened with great interest to the debates in Committee on Monday and was very struck by the Minister’s description of the prime focus of this part of the Bill. She made a great point of the intention that the Bill should be very tightly focused. The prime focus was described as being:

“on late payment, particularly when there is an imbalance of power between big business and small business”.—[Official Report, 26/10/15; col. GC 126.]

Amendment 39 falls squarely within that description but regrettably, if not astonishingly, it is not addressed in the Bill, nor do I believe that its aims would be met by the establishment of the Small Business Commissioner as defined.

The amendment is designed to address the specific issue of cash retentions in the construction sector, possibly the most significant payment issue facing the 250,000 or so small businesses in the sector. I will summarise the issue briefly. Retentions are supposedly held back as security for defective work. On average they amount to about 5% of payments due and about half of this is retained well beyond practical completion of a project, on average for a further 12 months but sometimes for very much longer. Some £3 billion of cash is estimated to be held back in the form of retentions at any time. This year alone, small businesses have already lost £30 million as a result of their debtor companies going into liquidation before paying the sums that they owe but have retained.

Small companies generally have little or no say over whether to accept the practice of retentions. They are essentially at the mercy of the larger firms on whose business they depend. Both the noble Lord, Lord Hodgson, and the noble Baroness, Lady Hayter, gave some specific examples on Monday of situations where small firms find themselves under unfair pressure from larger firms. The result is that small firms are deprived of funds that are due to them and are therefore unable to invest in new technology or equipment, unable to recruit new staff or take on apprentices, unable to grow their business and, in the worst cases, unable even to survive. Meanwhile, adding insult to injury, the funds wrongly withheld from them are used to provide working capital and investment resources for the client companies that have failed to pay up.

This is not a new issue. Two Commons committees in 2003 and 2008, the first chaired by the noble Lord, Lord O’Neill of Clackmannan, recommended the ending of retentions, at least in the public sector. The construction sector supply chain charter, and I think I got my tongue round that one, agreed by the Government’s Construction Leadership Council and issued by BIS last year, included the aim of moving to zero retentions by 2025. I have been made aware of even earlier reports from 1993 and as far back as 1963—I think even further back than the noble Lord, Lord Cope’s 40-year experience of late payment issues—recommending that retention should be abolished or at least placed in trust. Quite a few leading contractors in both the public and private sectors manage perfectly well without retentions.

The Bill presents a perfect opportunity finally to address this festering issue. I am not suggesting that retention should be abolished overnight or removed altogether. I am suggesting that the Government could deliver a really good stimulus to the productivity and output of small firms in the construction sector by starting the process of lifting this unfair burden from them now, with a view to having a better system in place by the end of this Parliament rather than having to wait for 2025 or even longer.

My amendment picks up the Minister’s very welcome commitment on Second Reading to commission analysis on the costs and benefits of such practices—cash retentions—to inform future action. First, the amendment sets a time limit for this analysis to be completed within nine months of the Bill passing into law. Secondly, it requires the Government to take action on the findings of the review, again with a time limit of 18 months from completion of the review. That should ensure that new rules are in place by the end of the current Parliament.

I thought of putting down a separate, more detailed amendment to set out a specific approach to ending the most unacceptable aspects of retentions by requiring them to be held in a separate bank account, in trust for the subcontractor to which they are owed. However, for the moment I would be happy to go along with the Minister’s proposed review, so long as it leads to action in the timescale set out in my amendment. I and some of the numerous bodies representing the small construction sector, virtually all of which wish to see this issue addressed, would always be happy to discuss the specific form of such action with the Minister and her officials. I have no reason to doubt the Government’s own desire to see an end to this pernicious practice of retentions in due course. Indeed, I was encouraged by the Minister’s response to the Oral Question today when she said that the Government acknowledge the issue but, given that action on this has been called for since 1963, if not before, “due course” does not seem soon enough.

Amendment 46, in the name of the noble Lord, Lord Stevenson, sets out a process for doing away with retentions in greater detail. I look forward to hearing the noble Lord’s arguments for this process, which I very much welcome as another route toward at long last making some real progress on this issue.

I have no connection with the construction sector, but I have run a number of small firms and am fully aware of the central importance of cash flow and the difficulty of keeping afloat, let alone investing in productivity and growth, if payments for work done are not received in full and in reasonable time. I was quite shocked to learn about the prevalence and impact of this practice of retentions and how long it has gone on without being fixed.

Small firms, which are without the resources of their bigger brethren, and indeed are dependent on them for their survival and success, are often bullied into accepting unfair terms. That is exactly why they need help and protection from government. Although the Small Business Commissioner would be a welcome part of such help, it really does not do what is most needed for small construction firms. The Bill presents a golden opportunity to inject some real spark into the small construction sector by tackling this issue of retentions, so long and so widely recognised as being objectionable, harmful and unjust. I beg to move.

[Viscount Eccles]

Is the noble Lord’s definition of retention moneys any moneys that are retained after a completion certificate has been issued? Is the issue that the works are agreed to have been completed, but we need something in case we have snagging and have to deal with it? Or is it that I am just being kept from my money?

[Lord Aberdare]

That is indeed the most objectionable part: on practical completion of the project, a substantial amount—often 2.5%—is retained, often for a year, two years, three years or even more. I am not attempting in this amendment to tackle the fact that retentions are withheld at each stage of the project, although that in itself would be another challenge.

[Viscount Eccles]

There could be an interesting distinction between practical completion and the issue of a completion certificate under the terms of the contract. Both parties might agree that the work has been finished, but it is probably in the contract that 5%, or whatever it might be will be retained for a period of time, which should be defined in the contract, in order to deal with snagging. I think the noble Lord’s position is that the contract is not written in sufficient detail to cover exactly what it is the parties have agreed.

[Lord Aberdare]

Another issue, beyond what the noble Viscount has said, is that very often there needs to be some limit on when practical completion has been achieved. There are situations where a small firm has been involved at the very beginning of a large project and the larger contractor is arguing that the project has not been completed and is refusing to release the money until a reasonable period down the track of that large project.

[Lord O'Neill of Clackmannan]

I support the noble Lord, Lord Aberdare. As I mentioned at Second Reading, I have an interest in this area, which is on record. The question raised here is a good one and is evidence of the need for proper consideration of the broad range of problems that retentions imply. Certainly, it is well noted that when you have major construction projects, very often the people who are in at the very beginning—for example, those doing the foundations and the steelwork—do not get their payments until the car park is completed. I am not sure whether that would be covered by a completion certificate. Let us face it, the construction industry is not really the most litigious of industries; indeed, people in it often cannot afford to have recourse to the law. Equally, they do not always have very detailed and specific contracts and, as we go down the supply side, the degree of vagueness becomes even more apparent.

--- Later in debate ---

[Baroness Neville-Rolfe]

I was delighted that the noble Earl, Lord Kinnoull, could bring his own practical experience of the market to the debate, including his experience during the financial crisis. That was picked up well by the noble Lord, Lord Stoneham, who rightly emphasised the cyclical nature of this vital UK industry.

Retentions themselves are not always a bad thing. One knows that from having domestic household repairs where frankly it is essential practice to keep back a small sum in case remedial work needs to be done. However, I have been persuaded by discussion at Second Reading and this afternoon that a review of the practice of retentions would be a good idea. The existing timeframes for change are extraordinary. I did not dare say that last time we discussed this before the election, but I am glad to be able to say it today and to hear the same comment from the noble Lord, Lord Stevenson.

I would be keen to make sure that the review was likely to develop recommendations capable of providing an enduring solution to what is a pretty deep-seated and rather complex issue—we are all agreed that it is not the simplest thing in the world. There is some work to do to ensure that the review is well grounded. Of course, it needs to cover a number of issues such as cash flow, and look at the period of time before retention must be released. It also needs to look at the small business angle, which is obviously relevant to today’s debate, including bricklaying.

I propose that the Government consider the best way to take the review forward. I will write to noble Lords in due course setting out precisely how we will do that; the terms of reference and a detailed timetable outside the Bill. If it helps, I am happy to commit to the review being completed within nine months of the Bill being passed, as suggested in Amendment 39 by the noble Lord, Lord Aberdare. This will give a little incentive to speed, because we have been here before and it would be nice to feel that progress could be made. I hope that the noble Lord, Lord O’Neill of Clackmannan, will not be disappointed by my helpfulness in that respect.

There is not a lot more to say. I hope that noble Lords will welcome the review and will feel able to close down the issue today. On the basis that I have described, I hope that they will happily withdraw their amendments.

[Lord Aberdare]

My Lords, I am extremely grateful to all noble Lords who have spoken in this debate. I have been very encouraged by the general tone of the debate. A number of noble Lords raised important practical questions which the review will address. I am particularly encouraged and pleased by the Minister’s response, for which I thank her. I very much look forward to receiving details of the review and the basis on which it will be conducted. I declare myself ready to do whatever I can to ensure that she secures her place in history as the Minister who ended retentions. I am happy to withdraw my amendment.

Amendment 39 withdrawn.