Construction Sector: Cash Retentions

Question

14:49:00

Asked by

To ask His Majesty’s Government what plans they have to end the practice of cash retentions in the construction sector.

My Lords, I pay tribute to the work of the noble Lord in championing this issue so successfully over the years. The Government are committed to amending the Reporting on Payment Practices and Performance Regulations 2017 to require firms to report on their policies and provide key metrics in relation to retentions. We intend to introduce legislation for this in 2024. We will consider whether further action on retentions is needed to deliver our manifesto commitment to tackle late payment.

My Lords, I am grateful to the Minister for that response. Cash retentions—withholding payments due to subcontractors for work done, often for an unreasonable period of time, or indeed for ever—have a highly damaging impact on the ability of small construction firms to invest, expand or even survive, and create pressure to cut corners on quality and safety. The Grenfell report is a shocking reminder of where that can lead. There is a long-standing goal of ending retentions by 2025—I welcome what the Minister has said about the implementation of the reporting requirement—and widespread industry recognition that legislation is needed to achieve this. What plans do the Government have to introduce such legislation, thereby freeing thousands of construction SMEs to play their full part in delivering the Government’s housebuilding goals?

My Lords, we are prioritising bringing forward the statutory instrument to amend the Reporting on Payment Practices and Performance Regulations this year, with the aim of it coming into force in 2025. This will require large firms to report twice per financial year on their policies in relation to retentions, including standard terms for holding retentions and metrics in relation to payment performance for retentions. We believe that this information will be most useful to small firms in the supply chain, and this legislation was developed in conjunction with firms in the industry and their representative organisations.

My Lords, this pernicious issue, interestingly, is not covered in the Government’s construction playbook, which sets out exactly how public works projects are to be assessed, procured and delivered. Indeed, a number of government departments and arm’s-length bodies continue to use retentions themselves. So would it be a good first step for this new Government to put their own house in order as soon as possible?

The noble Baroness makes an important point about public procurement. There are steps that we can take to progress on this issue; it is a manifesto commitment that we will do so. Obviously, we will consult before we introduce any further legislation, but we are committed to reviewing our policies on this issue, to enable more smaller firms to be able to access public contracts.

My Lords, late payments in the construction sector hold developments back significantly, which hinders progress on the delivery of new homes. The previous Government took strong action on this and published a payment and cash flow review in November 2023. What assessment have the Government made of the impact of cash retention on housing delivery, and will the Minister commit to continuing the excellent work of the previous Government to tackle this issue?

As the noble Lord has said, there have already been some changes made to this and we are following that up to introduce further changes. We will be addressing the value of payments and the level of invoices not paid because of disputes, but there is more work to be done on this and enforcement is obviously part of that. DBT has already written to 416 large companies not complying with the payment performance reporting requirements and 45% of firms written to have come into compliance. We have further follow-up action to make sure that those further transgressions are being addressed.

My Lords, I often think of Lord O’Neill of Clackmannan, who was a great champion of this issue, and I pay tribute to the noble Lord, Lord Aberdare, for following in his footsteps. Does the Minister agree with me that the present proposals do not get rid of the plain abuse of power that happens in subcontracting and contracting in construction? Late payment leads to bankruptcies in small and middle-sized firms and is part of the difficulty across the whole of the construction industry that leads to cutting corners in safety—and we have seen the results of that over many years. Does she agree that Lord O’Neill and the noble Lord, Lord Aberdare, who have been fighting for this for years, have been looking for something a bit more concrete?

My Lords, as I have said, it is important that we seek the views of industry on any reforms. We will take further action and obviously we will welcome the views of Members of this House, as well as the construction industry, as part of that process. The noble Baroness and other noble Lords have talked about safety and we are acutely aware of the situation with the Grenfell Tower final report, which highlights the systemic failure of institutions and individuals to ensure building safety and the safety of construction products and materials. My honourable friend the Parliamentary Under-Secretary of State for Building Safety and Homelessness tabled a Written Statement on 2 September that commits the Government to a system-wide reform of the construction products regulatory regime. Those reforms will take account of the recommendations of the Grenfell Tower inquiry.

My Lords, I thank the Minister for her replies so far. On her last answer, what proportion of businesses and organisations will be small or will represent small contractors and businesses in this trade? It is they who suffer most, which, as noble Lords have said, can lead to bankruptcies. If you are stuck with payments to make yourself for materials and supplies and you have not been paid by the overall contractor, you may go out of business. It is very important to bear in mind that we should give higher emphasis to the smaller contractors and businesses.

The noble Baroness is right that the smaller businesses are getting squeezed at the end of the supply chain, but we are already making progress with the steps that have been taken, which will continue with the new regulations that we will introduce. There have already been improvements in payment performance since 2018: for example, the average time to pay invoices has come down from 45 to 32 days. We are doing this on a step-by-step basis and we are working with industry—the construction sector—to make sure that this is what people want and truly effective.

My Lords, the Minister mentioned taking the views of industry. The Government have been taking the views of industry since the completion of their consultation in 2020. The reason that they have not come to a conclusion is that there is no consensus with the industry. I greatly miss the contributions of Lord Stunell, who described seeking a consensus on this issue as being like asking lions and lambs to sit down together and agree on a menu for tea. There is no consensus between the larger and smaller firms, which is why the only solution seems to many in the industry to be legislation. Reporting is all very well, but it will not solve the problem on its own.

My Lords, we have been working to resolve the problems associated with cash retentions through the Construction Leadership Council. As the noble Lord said, there are a wide range of views across the sector about the use and problems associated with retentions and how they might be addressed. Many in the industry are in favour of reform and are now calling for a legislative ban, in the way that the noble Lord described, but any policy solution must be sustainable and work for the whole of industry and its clients, addressing both the surety and fair payment issues that are thrown up.

Does the Minister acknowledge that the vice of late payments is not confined to the building industry? Do the Government have any plans to address this mischief more broadly?

Yes, my understanding is that the changes that will be introduced are not to affect only the construction industry. Certainly the late payments legislation that we are working on will be across the board and not specific to the construction sector.