Retentions: firms could be forced to publish time taken to release cash

Companies could have to report on the proportion of money they withhold in retentions under new proposals designed to drive down payment waiting times.

Under the plans, any medium-to-large company would need to submit information on their firm’s retention-payment terms if they are subject to existing rules around compulsory reporting of payment times.

Retentions are payments, typically of up to 5 per cent of a contract’s value, that companies higher up the supply chain hold on to as security.

The money is meant to be released after completion of the project if there are no defects to resolve, but payment delays are rife in the industry, causing cashflow problems along the supply chain.

The new requirements could see companies having to report on the percentage of the retention value held, data on when payments are released, and deductions from their payments.

According to the government, publishing the data could help to tackle the problem of companies holding on to retentions to use as working capital.

The proposal is one of many announced in a new consultation launched by the government this week, in what is said to be a bid to iron out the “worst kind of poor payment practices” by businesses.

The consultation is being prepared following a review into payment practices, which emphasised that the sector has “historically suffered from high levels of both late and nonpayment”.

The risk of firms using retentions as working capital came into sharp focus last year, when contractor Roadbridge UK collapsedowing £22.5m to creditors. Much of what was owed was understood to be in the form of retentions. The creditors were not expected to get any of that money back.

Electrical Contractors’ Association (ECA) director of legal and business Rob Driscoll said the proposed measures would “lift the lid on the scale and proportionality” of the use of retentions within construction. 

“Industry will be hard-pushed to legitimately argue that including data on retentions would not fundamentally enable the government to achieve its objective,” he added.

The proposed changes would offer suppliers a better chance to make “informed decisions” about the firms they want to trade with, enable them to negotiate fairer terms, and challenge late payment, the consultation document said. 

Firms within the construction industry are invited to respond to the plans herebefore 28 April.

Leading figures in the industry have repeatedly questioned the metrics involved in the reporting of payment times. Firms must report on the proportion of invoices they pay within 30 days, rather than the value, which experts have warned means high-value late payments can be “hidden” by a multitude of smaller payments that are paid on time.

The consultation will look at the existing reporting system, after several responses to an earlier review highlighted concerns.

The current regulations could mean there is an “obscured picture” of supply-chain late-payment, the consultation documents say, admitting that the current regulations mean companies could be “incentivised” to prioritise settling low-value invoices to “boost their ‘volume of transactions paid within terms’ figures”.

The consultation also proposes a requirement to record disputed invoices when reporting payment information, in a bid to “increase [a business’s] transparency and accountability”.

Respondents to an earlier review had suggested that including such a metric would be useful to suppliers and “inform their decision-making prior to contracting”. If a firm has disputed a high number of invoices, there may be less incentive to sign a contract with it.

Driscoll said: “[That measure] would put pressure on parties to identify and resolve disputed invoices quickly and efficiently, driving out poor behaviour from both payers and payees.”

The proposals come as pressure intensifies in the industry. Last month, business recovery specialist Begbies Traynor warned more firms are facing “critical financial distress”amid cost inflation and economic uncertainty.

Next week Construction News will publish the CN Payment 100, the definitive list of how promptly the industry’s biggest firms settle their invoices.