Local authorities urged to protect supply chain retentions

The Specialist Engineering Contractors’ (SEC) Group, representing the largest sector in UK construction by value, is calling on construction procurers in local authorities to protect retention monies belonging to SMEs in their supply chains.

This follows an extensive survey of English local authorities which has highlighted the use of cash retentions in construction-related projects procured by local authorities and the lack of guidance on best practice. The research, based on data gathered through the Freedom of Information Act, also revealed a lack of oversight by councils of payment performance along the supply chain.

Some key results from the survey:

  • The overwhelming majority of local authorities (almost 77%) deduct a 5% cash retention: 16% of them deduct cash retentions in excess of 5% (their main contractors will then deduct similar levels of retentions across their supply chains).
  • The majority of councils (53%) use cash retentions to bolster their working capital or fund other activities (including 6% of councils which invested them in the overnight money markets!)
  • 22% of councils do not deduct cash retentions at all. However, only 4 of them (1.5%) insist that their main contractors do not deduct retentions from the supply chain.
  • The vast majority of councils (80%) do not pass on any contractual requirements to their main suppliers or check on whether main contractors are releasing retention monies (of their sub-contractors) on time (or at all).

In addition:

  • Over 62% of councils are failing to comply with legislation requiring them to ensure that 30 day payment clauses are included in sub-contracts and sub-sub-contracts (although 22% said they intend to do this).  These clauses also apply to retentions which must be released within 30 days of becoming due for release.
  • Only 12% of councils have put in place some monitoring and reporting arrangements that sub-contractors are paid within 30 days (though 17% said that they are considering to implement some monitoring arrangement in the future).

Commenting on the survey results, Small Business Commissioner Paul Uppal said that public procurement can drive positive change across the supply chain. He added:

“Local authorities should consider how their projects can support small firms in their areas by insisting on fair treatment of their supply chains – ensuring that 30-day payment clauses are inserted and observed in supply chain contracts and that retentions, if held, are ring-fenced and released promptly across the supply chain.  As Small Business Commissioner, I am particularly concerned about the impact of payment problems on the mental health of those running small businesses. A statistic that I find particularly shocking is that construction workers are six times more likely to die by suicide than by falling from height.”

SEC Group President Lord O’Neil said that post-Carillion Parliament was becoming increasingly anxious about the position of SMEs in construction:

“We have repeatedly asked Government to take action on cash retentions by adopting the Peter Aldous Bill to protect the supply chains’ cash. When local authorities hold retentions from their main contractors, the monies are de facto guaranteed – they won’t go bust. When the main contractor holds retentions, there is no such guarantee for their sub-contractors.”

SEC Group is asking local authorities to adopt guidance on the protection of retentions in their supply chains.  They should ask contractors on their approved suppliers’ lists to include a contract clause; this should protect retentions main contractors may hold across their supply chains in the event of their insolvency (suggested Procurement Advice Note is attached as an Annex).

SEC Group is also asking the Government to strengthen the Public Contract Regulations by:

  • making it a statutory requirement that all suppliers will be paid within 30 days on public sector projects;
  • including an option for public bodies to make direct payments to sub-contractors;
  • including a yellow/red card system that bars firms from working for the public sector for up to 3 years where they have not complied (following warnings) with paying within the statutory 30 days.
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