My Lords, Amendment 5 is in my name and that of my noble friend Lord Mendelsohn. I declare an interest in that my wife is a practising solicitor who deals with
construction contracts. When we raised this issue in Committee I made the following points. Recent research shows that about £3 billion is outstanding within the construction industry, and only in that industry, by way of cash retentions; that the practice unfairly enhances the working capital of the party deducting them; and that most of those who retained moneys openly accepted that they added cash retentions to their working capital or actually reinvested them. The effect is that bodies that are commissioning work are also in effect borrowing from the small firms that are carrying out the work. This 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. However, there is no statutory protection for the retained moneys that will ensure that they will in fact be available for release if, in the event, there are no uncompleted remedial works that need to be done. There is a good case for any retention funds to be kept separate from working capital, perhaps within an escrow account—as is now used for government contracts—or a separate trust account.
When the Minister responded to the debate, as well as outlining the new but still rather patchy approach to payments being adopted by the Government, she agreed that there were a number of issues of concern with the payment culture in the construction industry. But she said that the current statutory framework governing contractual terms on payment—which was introduced in 2011—with a prohibition on “pay-when-paid” clauses and a right to adjudication, would be sufficient to see out this unfortunate practice. She added that since 2014, the Government have been working with the industry to implement a payment charter that contains 11 commitments, including one specifically aimed at removing the need for retentions, with the intention of moving by 2025 to a position where retentions are no longer necessary.
The noble Baroness pointed out that the powers being taken in the Bill would be sufficient to gather the information needed for a review of current policy, and I take that point. But she was a little unconvincing about why it will take 10 years to gather the information about this issue, even if there were a need to go wider than just the construction industry. If this amendment is accepted, it would have far-reaching benefits for small businesses throughout the construction industry. They would not have to wait another 10 years before this practice is outlawed—but even if they did have to wait that long there is surely a case, which I have outlined above, for action now to require the use of escrow accounts for this type of payment. I beg to move.