In October 2017, the Department for Business, Energy and Industrial Strategy (BEIS) launched two consultations on payment in the construction industry. With the closing date for comments fast approaching, now is the last opportunity for those with an interest to submit their comments and influence future government strategy.
The focuses of the two consultations are:
- The use of cash retentions in the construction industry.
- A review of the implementation of the changes to the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) which came into force in 2011 (which we have referred to as the 2011 Changes), as well as a general review of whether the Construction Act remains fit for purpose.
The deadline for responses on both consultations is 23:45 on 19 January 2018, with an aim to provide outcomes for both consultations within 12 weeks of their closure.
Consultation on cash retentions
The consultation on cash retention is based upon preliminary research by Pye Tait Consulting, conducted on behalf of the BEIS.
"Cash retention" is simply where a payer withholds portions of payments (which are otherwise due and payable) for works which have been completed by the other contracting party. Their purpose is to act as security against the possibility that the work is either not completed at all (normally in the case of insolvency of a construction firm), or that the completed works are defective.
The BEIS's concern is about the impact of cash retentions on those further down the supply chain (subcontractors or sub-subcontractors, as opposed to main contractors). Subcontractors or sub-subcontractors are generally "small" companies for whom cash retentions have a disproportionally large effect.
The main concerns the BEIS has raised are:
- Retention monies being lost to contractor insolvency. This is a significant problem, with 44% of construction companies affected in the previous three years 
- Some payers are still making payment of retention conditional on the performance of obligations under another contract (despite this being outlawed under the 2011 Changes).
- Unjustified late and non-payment of retention is a significant issue.
- The cash flow impacts of cash retentions on small tier 2 and 3 suppliers.
As the Business Minister Lord Prior of Brampton says in the consultation "Despite examples of positive changes [brought about by the 2011 Changes] … there is still scope for improvement in relation to payment practices in the construction sector".
The intention of the consultation is therefore "to seek information on … cash retention under construction contracts", including seeking feedback from the industry on:
- a) their current experience of cash retentions
- b) the effectiveness of current measures to protect those who have had retention withheld
- c) possible alternatives to the cash retention system, including those currently used (such as project bank accounts and bonds) and a potential new statutory solution of a Retention Deposit Scheme (similar to the tenancy deposit scheme).
Consultation on the 2011 changes to the Construction Act
The aim of the second consultation is to examine the impact of the 2011 Changes on the industry. These were brought into force by Part 8 of the Local Democracy, Economic Development and Construction Act 2009.
The first section of the consultation therefore looks at the effectiveness of the 2011 Changes, in particular how effective they have been in relation to the 2011 Changes' three objectives, which were:
- Increasing transparency in the exchange of information relating to payments.
- Encouraging the use of adjudication, where appropriate.
- Strengthening the right to suspend performance.
The first section of the consultation therefore asks questions about measures which were intended to address the costs of adjudication, designed to improve the transparency of the payment framework and designed to improve the right to suspend performance for non-payment.
Two of the changes which may be the focus of respondents' comments are:
- Many in the industry have complained about the change to permit adjudications where the contract is an oral contract. There is a view that these give rise to more detailed disputes and submissions as to whether a contract has been formed, and therefore this change has in fact resulted in lengthier adjudications and increased costs. As the Hon. Mr Justice Coulson said in RCS Contractors v Conway, adjudications regarding oral contracts are "the opposite of the quick, cheap dispute resolution service that adjudication was intended to provide."
- The consultation does not specifically mention it, but one of the key effects of the 2011 Changes has been the rise of the so-called "smash and grab" adjudications. These adjudications are launched by an unpaid party where the paying party has failed to issue a Payment Notice or Pay Less Notice within the required timescales. In principle, in these circumstances, the unpaid party is entitled to payment of the entirety of its payment application, irrespective of the amount in fact due. The paying party is unable to launch a counter adjudication for a determination of the true value of the account, but instead must wait to correct the value in a later interim application.
Sections 2 and 3 of the consultation have a wider remit, asking more general questions about:
- The ongoing fitness for purpose of the Construction Act and the use of adjudication to resolve disputes.
- The affordability of adjudication and whether the costs of it prevent parties from using it.
These sections are looking for comments on, for example, the complexity of the payment framework, current payment days, how often adjudication is used, how often the adjudicator actually reaches a decision within 28 days, the costs of adjudication (and whether those are disproportionate) and "abuse" of the adjudication process, such as "ambush" tactics.
The initial purpose of adjudication was of course simply to help cash flow in construction projects, by providing a third party opinion on a payment application. However, in the 20 years since its introduction, there has been a trend of bringing bigger and more complex claims to adjudication than was ever likely to have been intended, with similarly increasing costs.
There are a significant number of issues which the BEIS is consulting on, many of which are of real concern to large sections of the construction industry. It will be interesting to see:
- Whether the consultations will highlight the same issues or whether new ones will be brought to light.
- How the government might respond to the consultations' findings. As the Electrical Contractors' Association and the Building Engineering Services Association have highlighted in a recent statement, consulting on cash retention is nothing new, saying that "while the significant … problems of cash retentions in construction have been identified by independent research … the government has chosen to consult once again on the extent of the problem".
Therefore, the question will be whether any statutory changes will be planned following both consultations. It is hoped that they will follow if there is a clear consensus about what further improvements are needed.
To access the BEIS list of questions regarding the Construction Act consultation, please click here.