Retentions ban on table in new late payment crackdown

Retentions could be banned and large contractors fined for paying their supply chain late under proposed new legislation to crack down on payment delays announced today by the government.

The Department for Business and Trade today (31 July) announced that it will legislate to introduce what it described as the “strongest legal framework on late payments in the G7”.

The department said it was determined to crack down on a problem which, across all sectors, costs the UK economy £11bn per year and closes down 38 UK businesses every day.

Prime Minister Keir Starmer said: “From builders and electricians to freelance designers and manufacturers – too many hardworking people are being forced to spend precious hours chasing payments instead of doing what they do best – growing their businesses.

“It’s unfair, it’s exhausting, and it’s holding Britain back. So, our message is clear: it’s time to pay up.”

The government’s Small Business Plan, published today, said it would launch a consultation on legislation to usher in:

• “Options” to reform or ban cash retentions in construction contracts.
• Stricter maximum payment terms.
• Stronger powers for the Small Business Commissioner.
• Mandatory payment of interest on late invoices.
• Fines against large companies that persistently pay their suppliers late.
• Exploring potential roles for audit committees or company boards in providing commentary or recommendations regarding payment performance to company directors before payment performance data is submitted to the government and included in the company’s annual report.

The plan said: “Whether the cause is deliberately poor practice such as using late or long payment as a form of ‘free finance’, or more simply administrative errors in processing invoices, the problem remains too widespread despite some recent improvements in performance.”

Reacting to the proposed package, Rob Driscoll, director of legal and business at the Electrical Contractors’ Association, said: “Carillion, ISG, Buckingham and others have created watershed moments of clarity that industry cannot continue in the infinite loop of debate over ‘what to do about the abuse of cash-retentions’.

“Other jurisdictions have already created a model which work to protect all parties.

“Government is giving industry a game-changing opportunity to break the Sisyphus cycle of debating reform in this area and we must come together, innovate, evolve and support each other for the long term resilience of UK construction.”

However, he warned that some firms might seek to get round any retentions ban, and that the government needs to address the concerns of those who remain concerned over suppliers who fail to remediate defects.

Iain McIlwee, chief executive of trade body Finishes and Interiors Sector, said: “Fundamentally we support the process of reform, including the automatic release of retentions at date connected to the completion of a subcontractor’s works rather than a practical completion date for the project that beyond their control and which they might not even be aware of.”

He said that the UK should seek to replicate New Zealand, which recently introduced laws to ensure retentions are held in trust.  

“When Collateral Warranties are implemented, retentions should be immediately and automatically returned,” he said.

Mace chief executive Mark Reynolds last year told Construction News that government intervention was needed to get rid of retentions as there is not enough support for the measure in industry.

Earlier in 2024, CN reported comments by Isabel Coman, a director at Transport for London and Construction Leadership Council board member, who described retentions as one of the most important in the sector.

Driscoll called the wider payments proposals in the Small Business Plan a “seminal once-in-a-generation moment” for the industry.

However, he said that if the measures are to have meaningful impact, “the ‘elephant in the room’ is a Small Business Commissioner who cannot touch the 99 per cent of the construction industry that are SMEs because construction is outside of the SBC’s jurisdiction”.

David Barnes, the Chartered Institute of Building’s head of policy and public affairs, said: “We have long called for stronger protections for SMEs, which form the backbone of the construction industry.

“With the majority of the UK’s sector being made up of SMEs, we welcome the government’s focus on supporting smaller businesses through this new plan – especially the steps to address the issue of late payments.”