New figures have revealed that UK construction contractors have been hit by £700 million in cash retention losses caused by insolvencies in the past three years.
The figures, which come from a report commissioned by the Department of Business, Energy & Industrial Strategy (BEIS), have rightly been described as ‘shocking’ by the trade body the SEC Group.
The SEC claims that the brunt of those losses have been borne by small sub-contractors who, sitting further down the feeding chain, are less likely to recover monies owed to them if a client or main contractor goes bust.
The figures have underlined the SEC’s calls for an independent body to administer retention monies so no one is left out of pocket in these sorts of circumstances.
The problem with retention
Retention has always been a controversial issue in construction. The principle is generally sound - clients commissioning construction work will hold back a portion of the fee, usually around 5 per cent, in lieu of any repair work or adjustments required post completion. It is a valid way for clients to protect themselves against poor standard work, or having to incur unforeseen costs which should rightly fall on the contractor.
The problem is how this retained money is managed, which has long been a source of conflict between clients, contractors and sub-contractors. Clients do not always release money owed on time, or in accordance with the terms of the contract. This can cause serious cash flow problems for contractors, especially as that 5 per cent might be the difference between making a profit or a loss
The difficulties only escalate the further down the contract chain you go. Sub-contractors have a portion of their fees retained too. But repayment is not directly linked to the work they do. So you might have a small firm brought in to do the plumbing on a project. Once the build is finished, the client finds an issue with the electrics, and refuses to release retained fees until it is put right. This has nothing to do with the plumber, but they are left short nonetheless.
Insolvency also causes a major issue in fee retention. Once a firm that is holding onto retained monies goes bust, those owed the money are embroiled in the messy business of trying to recover it. This is not just an issue if the client tendering the work goes out of business. Retention happens right the way down the contract chain - the client will retain fees from the main contractor, who will in turn retain fees from contractor X who does the same for sub-contractor Y and so on.
If any firm goes out of business at any point, it puts everyone at risk of not recovering their retention cash. According to the BEIS report, Retention in the Construction Industry, the practice of holding retained fees in main bank accounts is creating additional risks, as it offers no protection should insolvencies happen further up the chain.
Time for reform
The BEIS commissioned the report into retention precisely because of these concerns. What the findings show is, due to the increase in insolvencies in the construction industry over the past decade, getting retained cash back is no longer just a contractual or compliance issue. Contractors, especially the smaller ones, are losing out big time.
Protecting small businesses from financial hardships caused by the behaviour or difficulties faced by large clients should be high on the government’s economic agenda. It needs to stamp out the domino effect a large company failing can have, one insolvency leading to several other smaller businesses also going under because of the losses they incur. This is a major barrier to economic prosperity.
The way retention is administered in the construction industry at present, it makes this domino effect inevitable. The sensible solution would be to adopt the SEC’s recommendations, have all retained fees administered and held independently, and therefore give sub-contractors and small firms due protection should a client go under.
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Image "img_4775_Building_Construction" by flickr user John Schilling is licensed under CC BY 2.0