Will the abolition of cash retention revolutionise the construction industry?
For many years, the cash retention model prevalent in the construction industry means sub-contractors have experienced uncertainty regarding payment terms within a project. Its purpose is to ensure the contractor completes the job however, it is not unusual for contractors to be waiting years for payment – if at all. Despite attempts to safeguard sub-contractors against the unnecessary retention of funds, such as the 2011 Construction Act, some have experienced loopholes, meaning retention hasn’t been paid in a timely manner.
But this is a conversation that keeps on occurring. Just a few weeks ago The Specialist Engineering Contractors’ (SEC) Group Scotland announced it has welcomed plans for consultation on how to curb the abuse of cash retentions in the Scottish construction industry but still, sub-contractors are plagued with the negative side-effects that cash retention brings.
What’s the problem with cash retention?
The long-term nature of construction projects can mean a protracted length of time between project start date and the release of retention monies means sub-contractors will stop trying to collect the money, mark it as a loss and move on. Moreover, when a main contractor goes into administration, such as Carillion, subcontractor retention monies will be given to the creditors, leaving the sub-contractor significantly out of pocket.
What other options are available?
Steps need to be taken to protect sub-contractors, which are often smaller businesses with limited cash flow. If the industry refuses to abolish the cash retention scheme, there are methods, such as bonds and trust accounts, that can be used to safeguard both main contractors from sub-standard work and sub-contractors from unreasonable withholding of funds.
Until this happens, developers need to provide due diligence when appointing a main contractor to ensure the longevity of the company and provide reassurance to sub-contractors, and consequent suppliers further down the supply chain, that payment will be made upon completion of the job.
Outsourcing specialist work ensures that we not only have a financially healthy construction industry, but also means each element of a project is executed by a professional, providing better end results for the client. The use of sub-contractors has enabled skilled workers within the UK to set up their own companies, creating healthy competition within the industry. Moreover, the loss of main contractors, like Carillion, had led to an increase of contracts being brought in house, further impacting sub-contractors.
Whilst Scotland seems to be taking a step in the right direction, it seems that the rest of the UK is a bit further behind. In fact, SEC Group Scotland chairman Eddie Myles said Scotland needs to “act now rather than wait for any solution promulgated by the UK government which could take four or five years to come to fruition.”
The long-term impact of cash retention can be felt by sub-contractors and suppliers much further down the supply chain. In order to ensure we work in a diverse market, we need to protect these smaller, yet valuable, contributors from the unfair retention of cash in construction.