Let’s fix construction’s payment issues

Back in July the government, in line with its manifesto commitment, published its consultation on tackling poor payment practices. This proposed “the most significant legislation to tackle late payments in over 25 years”. The consultation closed last month.

Apart from retentions reform, the proposals were not construction specific. I’ll consider the options for retentions reform before discussing other matters that must be addressed in any future legislation.

One had a sense of déjà vu on reading the questions dealing with banning retentions or protecting them. There was a consultation on retentions back in 2017 following publication of research by Pye Tait commissioned by the Department for Business, Energy and Industrial Strategy (BEIS). The authors concluded that the most viable reform was a scheme to ring-fence the monies. This was favoured by the majority of respondents, despite misleading statements from BEIS that there was no consensus in the industry on the way forward.

The reality is that Build UK tier 1 contractors favoured a ban on retentions. They devised a roadmap to ban retentions by 2025, which was taken up by the Construction Leadership Council. We are well into 2025 and it seems that this was a roadmap to nowhere; supply chain retentions continue to provide an annual cash flow boost of £6bn to clients and tier 1 contractors.

On retentions: Let me first scotch the banning idea. Great to have, but unlikely to work. There is a bill which could provide a template for statutory retention deposit schemes

Let me first scotch the banning idea. Great to have, but unlikely to work. In 2007 the US state of New Mexico legislated to ban retentions on public works contracts. The ban was undermined by numerous attempts to get around it. This is the usual outcome of banning anything. Every other jurisdiction has dealt with the matter by requiring retentions to be held in trust in a separate account. Perhaps the best example is Western Australia’s Building and Construction Industry (Security of Payment) Act 2021, which was fully implemented in February last year. I drafted the Construction (Retention Deposit Schemes) Bill 2017-2019, as a private member’s bill for Peter Aldous MP, which received support from almost half of MPs. The bill proposed that retentions be held in government-approved retention deposit schemes (similar to the tenancy deposit schemes introduced by the Housing Act 2004). This bill could provide a template for statutory reform of the practice.

In 2017-18 BEIS consulted on changes to the Construction Act. Over the years courts have raised concerns over the excessive cost of adjudication, especially for SMEs. This was reflected in responses to the Construction Act consultation. At minimum, any new legislation must mandate the use of the adjudication procedure in the Scheme for Construction Contracts to avoid ancillary disputes about whether a contractual procedure is Construction Act compliant. Furthermore, referring parties should have the right to appoint nominating bodies having capped fee schemes.

Although responses to the payment provisions were rather more mixed, there was a general consensus for streamlining the clunky payment notice procedure. There should only be two payment notices – a payee notice and the option of a payer’s pay less notice (the latter must be issued no later than 20 days from the due date). It is wholly unfair, for example, that a payee should receive a pay less notice on the 59th day when its final date for payment is 60 days following the due date. 

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Two other matters: First, “pay when/if paid” must be completely abolished. Second, process plant construction must be brought within the scope of the Construction Act.

Finally, project bank accounts (PBAs). Over the years they have helped supply chain firms avoid millions of pounds of losses arising from upstream insolvencies. Payments to all can be made within a period of less than 20 days. Given this success, the government must legislate to mandate their use on public sector construction and later extending this to the private sector. For this purpose the government could use the provisions of the Public Sector Supply Chains (Project Bank Accounts) Bill 2019,* promoted by Debbie Abrahams MP. A digital PBA platform has now been developed by Saible to ease the process of setting them up.

Recent measures have failed, yet again, to reduce the extent of payment abuse in the industry. A couple of years ago the Chartered Institute of Procurement and Supply carried out some research into the impact of the payment reporting regulations. The conclusion was that these had had minimal impact on payment performance. The measures I’ve highlighted must be addressed if we are intent on eradicating this scourge on the industry’s ability to perform at its best.

* This bill was reproduced in Payment in the Construction Industry – Where Are We Now? by Rudi Klein and published by the Society of Construction Law (June 2019)

Rudi Klein is a barrister with Kleinlegal