Ensuring prompt and fair payment for completed work is crucial for small and start-up companies where a delay in payment can affect investment, improvements and growth. In fact, one of the biggest challenges facing construction SMEs is cash flow and this is being exacerbated by an increasing number of unresolved and unpaid retentions. By Carl Ghinn, managing director at Fixmart.
Retentions have been used in the construction industry for over 100 years and involve the contractor keeping a percentage of the final payment until the work is completed. It is used to encourage efficiency and productivity, and to ensure contractors achieve practical completion on a timely basis – it also acts as an incentive for a defect-free project. However, in addition to the time involved in managing and recovering retention payments, companies further down the supply chain can experience a drain of working capital and inflated bad debt as well as limited access to finances.
In fact, according to trade bodies BESA, ECA and Select, one third of engineers have 10% of their turnover locked in retentions and in research conducted by Pye Tait, it was revealed that over £700m of retention money has been lost due to upstream insolvency in the past three years. On average, that is about £27,000 per contractor.
In an attempt to help provide financial security to SMEs, a new Bill was unveiled at the House of Commons briefing at the beginning of January 2018. The ‘Aldous Bill’, which is being introduced under the ‘Ten Minute Rule’ by Peter Aldous MP, will seek to amend the 1996 Construction Act to ensure that retentions within all construction projects are held by a third-party protection scheme. This would provide SMEs with peace of mind as they are more likely to be paid the full amount for completing jobs with the money being held by an independent body. The aim is to end the issue of upstream insolvency and the working capital it takes from the industry and SMEs.
More than 20 leading construction trade bodies, including the ECA and Building Engineering Services Association (BESA) who helped Mr Aldous develop this Bill, have openly declared their support. It is important to mention here that whilst the Bill does not seek to abolish retentions completely, it addresses the fact that construction SMEs money is not protected.
This isn’t first time that the government has attempted to regulate payment practices in the supply chain to help SMEs’ cash flow. As of April 2017, large companies had to publically report twice a year on their payment practices and performance. The move was part of the government’s transparency agenda to combat poor payment practice and should help SMEs, and the 50,000 construction businesses that close each year, to continue to operate.
As with many regulations and laws in the construction industry, it takes a while for the changes to filter down through the supply chain. So, whilst we wait for the ‘Aldous Bill’ to make its way through parliament, and potentially become law, suppliers to the industry can help construction SMEs with their cash flow. For example, preparing for any price fluctuation in materials by bulk buying in advance can soften the blow of a potential price increase for a company that has to go out for tender a year in advance of a project starting. The Fixmart warehouse can hold around £1 million worth of stock so we purchase large quantities of our core lines to prepare for any eventualities which could result in a price increase. Additionally, offering lenient credit terms can help clients mitigate the risk of stunted cash flow – we offer up to 60-day credit terms, subject to necessary checks.
To conclude, whilst retentions may be a necessary insurance for contractors to guarantee timely and quality completion, it is not acceptable that it has become so difficult for construction SMEs to get their full payment. So, it is the responsibility of suppliers to provide solutions that fully support their clients to ensure these companies are able to continue to operate.
