My Lords, I rise to move Amendment 12, which is in my name and that of my noble friend Lord Mendelsohn. I declare an interest in that my wife is a solicitor who deals with construction contracts.
It was a surprise to me to discover that at any one time, according to recently released figures, about £3 billion is outstanding within the construction industry by way of cash retentions. This figure represents the aggregate of monies which have ultimately been provided by small businesses, ostensibly as security in the event they do not return to remedy any defects in their work. I suspect that this process is taken from domestic situations; we are all aware of the problems that can be caused when one tries to get a rogue trader or contractor back to remedy faulty work.
However, in a commercial setting, the situation is surely different. It appears that the main motive for deducting retentions is to enhance the working capital of the party deducting them. Using the FOI Act, the Specialist Engineering Contractors’ Group recently carried out research among public bodies of the use made of cash retentions. It found that 71% of those surveyed added cash retentions to their working capital or admitted that they actually reinvested them while they waited for the evolution of the work process being undertaken by the contractor. The effect is that bodies that are commissioning work are also borrowing from the small firms that are carrying out the work. That is counterproductive to good economic activity at a time when such firms are also having major problems in accessing finance.
The key issue is that cash retentions are being deducted from payments already earned. They are handed over on condition that they are returned only unless they are used to remedy defects in the event that the firm does not do so. However, this is a very unsatisfactory situation, as in the mean time there is no protection for the retained money that will ensure that they will be available for release if, in the event, there are no uncompleted remedial works. We think that there is a good case for any retention funds to be kept separate from working capital and we suggest that there should be some form of trust in which these amounts are held.
These issues apply of course all the way down the supply chain. It is obviously true that for public sector works, small firms operating directly with the public sector are unlikely to see that body go bust, although it is not unknown. However, if they are dealing with private companies that are themselves contracted by the public sector, the firms further down the supply chain are at risk of losing their retentions if their top supplier, for instance, becomes insolvent. On the other hand, a tier-one supplier at the top level does not carry this risk because it will be working with bodies that are unlikely to become insolvent.
Of course, the business department has a construction supply chain payment charter, which was launched on 22 April 2014. In it is expressed the wish that these retentions should be abolished, which, I think, is good news. However, unfortunately the proposal is to wait until 2025. Governments have long aspirations and wide horizons but to wait another 10 years for such an obvious piece of legislation seems a little otiose. I hope that when the Minister comes to respond she can explain exactly why the delay is there and what it is for.
If it were possible for the Government to accept our amendment, this would begin to move us down the process. In particular, if it were appropriate to ensure
that money held on retention was, in fact, placed in trust, separate from the working capital of the companies that were involved in it, that would certainly have the advantage of reducing the risk to those lending their money to those commissioning it. The amendment would enable the Secretary of State, through regulation, to be better informed about the extent of the problem and then to issue regulations when the appropriate time came. In this case, we are quite happy for this to be a “may” and not a “shall” provision.
If the amendment is accepted, it will have far-reaching benefits for small businesses throughout the construction industry. It will enable them to provide more jobs and increase their training provisions, and investees in resources will help to improve policy and the timeliness of delivery. How could we be against that? I beg to move.