I rise to speak to my new clause 12 on the protection of subcontractors’ payments under construction contracts. As the explanatory statement describes, the new clause
“ring-fences moneys due to subcontractors in construction supply chains through mandating the use of project bank accounts and ensuring that retention moneys are safeguarded in a separate and independent account.”
2.45 pm
Some Members will recall the collapse of the construction firm Carillion back in 2018. A local joinery business in my constituency lost £176,000 in the process. That is a lot of money for a small business. The owner Neil Skinner had been owed money by Carillion, but he said at the time that Carillion often “went over sixty days” before paying him, and that
“after a lot of chasing, and once the job for a particular customer was finished our sanction, to stop working, was gone and their payments just stopped… They resorted to using all the familiar late payment tactics from finding fault with an invoice, referring us to their…accounts office, statement queries, disputed invoices paid, and so on. Then, lastly, they imposed a 15% non-negotiable discount on our work or they would send all unpaid invoices back to their quantity surveyor’s...department. We reluctantly signed this contract and then they went ‘bump’ the Monday after signing and 10 days before the first…payment was due.
As a result of Carillion's late payment tactics small enterprises like mine have been suffering greatly, if not terminally.”
Some 30,000 small business contractors working in Carillion’s supply chains were affected, losing an average of £141,000. A total of £2 billion was owed by Carillion to its suppliers. The vast majority of the suppliers never received any recompense whatsoever. It has been estimated that 780 small building firms went into insolvency in the first quarter of 2018 as a direct result of Carillion’s collapse. There was a 20% increase in insolvencies on the previous year.
According to accountancy firm Mazars, 4,135 construction businesses—mainly small firms—went into insolvency over the 12 months to the end of January 2023. That is a rise of 49% on the previous year. This year, it is estimated that 6,000 small construction firms are at risk of insolvency. The number of insolvencies in the sector continues to be greater than in other sectors, although retail is very close behind, and is at the highest level for 13 years. How will we build our homes, hospitals and schools of the future without the construction firms to do that?
The majority of the insolvencies are the result of unprecedented cost pressures on small businesses: hikes in the cost of energy, materials inflation and increased labour costs. But fundamentally, the ability of firms to cope with those costs continues to be severely hampered by poor cash flow, which is often the result of poor payment practices, lengthy payment terms, myriad excuses for paying less than the amount invoiced or applied for, and a non-release or late release of retentions money.
Small businesses often purchase materials well ahead of the commencement of work, but wait weeks to be paid. In the steel sector, for example, 90% of the contract value is expended before firms arrive on site, and they wait weeks to be paid. That then increases the risk that they will never get paid because their tier 1 contractor has gone bust in the meantime. Advance payments or deposits for early work are rarely available. The majority of payments, especially the release of retentions moneys, are always late. On top of that, there is a new issue. It is becoming a common practice for the large tier 1 contractors to refuse to compensate tier 2 subcontractors for rising material prices, even if they have a price adjustment fluctuation clause in their contract. They are absolute cowboys. Those large companies, of which Carillion was a classic example, are noted for manipulating their supply chain’s cash. The Department for Business and Trade has regularly described the business model as unsustainable, yet it allows it to persist.
The solutions are there for the Government: project bank accounts and the ringfencing of retention moneys. That was what I proposed in my 2019 Public Sector Supply Chains (Project Bank Accounts) Bill. Unfortunately, the Government did not pick it up, so the new clause is an attempt to have that provision resurrected. I hope the Minister is listening and will respond, because, as I said to him on Second Reading, the current measures will not work. Project bank accounts are offered by major banks, such as Lloyds, Santander and Royal Bank of Scotland, so this should not be a party political point and the Government should take on board my new clause. If they do not, I would appreciate an explanation as to why not.
Payment abuse has consequences far beyond the firms directly affected, as Dame Judith Hackitt, who chaired the independent review of building regulations and fire safety, concluded. In her report on Grenfell, she noted that poor payment practices compromise construction quality and safety.
At the beginning of last year, the Department for Levelling Up, Housing and Communities published guidance on collaborative procurement to support building safety. That guidance was drafted as support for the Building Safety Regulator in the implementation of the Building Safety Act 2022. The guidance recommended, first, the use of PBAs across the industry and, secondly, cash retention. My new clause 12 is directed at providing greater payment security for small and medium-sized enterprises in construction supply chains.
It should be noted that on public sector work those firms have no protection—none whatsoever—in the event of tier 1 contractors becoming insolvent, but tier 1 companies do have such protection, because contracting authorities do not generally go into insolvency. It has been estimated that £800 million of subcontractor retentions were lost in the Carillion collapse. Protecting retention moneys in the way I suggest would also protect public funds from tier 1 contractor or further supply chain insolvency, as retention moneys are held in ringfenced bank accounts instead of the back pockets of contractors until project completion. The National Audit Office estimated that the taxpayer lost £148 million when Carillion collapsed.
My new clause 12 would require that contracting authorities use PBAs on their projects where the net value of the main contract is over £2 million. To date, PBAs have proved to be the most effective mechanism for reducing payment abuse, because all firms in the supply chain receive their moneys directly from the contracting authority via the PBA, rather than moneys having to pass through the hands of the main contractor.
My new clause 12 is required because the Cabinet Office has failed to enforce the implementation of its own policy that PBAs must be used unless there are compelling reasons. That contrasts with the recent action of the Queensland Government in Australia, who have legislated to mandate the use of PBAs for all public and private sector construction projects over £650,000. They are also mandated for use in public sector projects by contracting authorities in Scotland and Wales; I am merely asking for the requirement to be enforced in England as well. This is about fairness between large and small companies—a real abuse of power happens with the large companies—and about fairness and levelling up across the country.
PBAs shorten payment periods to 12 to 15 days and moneys in the account are protected from tier 1 contractor insolvency. By using PBAs, National Highways has ensured that all supply chain firms are paid within 18 days. My new clause 12 would require contracting authorities to deposit progress payments in a PBA for onward transmission to the beneficiaries—the main contractor and suppliers. Any disputed amounts must remain in the PBA until the dispute is resolved, and any retention moneys must be safeguarded in the PBA until they are due for release.
My proposed subsections (7) to (10) are designed to address the failure of the Department for Business and Trade to respond to the outcome of its consultation on reforming the practice of retentions, which closed in January 2018. The overwhelming majority of respondents supported a proposal to ringfence retention moneys, but the Department and its offshoot, the Construction Leadership Council, have refused to act on this.
In over five years, approximately £1.5 million of retention moneys were lost by small businesses because of upstream insolvency. Retention moneys legally belong to the firm from which they are withheld. They are usually withheld only to boost the cash flow of the withholding party. In the 2017-18 Session of the House, the hon. Member for Waveney (Peter Aldous) introduced a private Member’s Bill to ringfence retentions in a secure account. Almost 300 Members of the House indicated their support for that Bill.
If passed, my new clause will transform public sector construction procurement and provide added payment safety. It will inject greater trust into delivery teams and enable greater investment in skills and digital technologies. As I said before, none of the measures the Government have announced, since I raised the issue on Second Reading, will achieve what the new clause would achieve. They will not protect the supply chains, so will the Minister say in his response what he is going to do to protect small businesses?
My 2019 Bill would have prevented both the losses experienced by Neil’s business and other small businesses, and the collapse of the 780 building firms. In addition, it would have prevented the late payment abuse that construction firms and others have experienced day to day since then. My new clause 12 would also protect those small businesses in their contracts with large companies, so I hope the Minister will consider it.