Consultations on payment practices in the construction industry
It may or may not be an urban myth that it was Lord Denning, the famous "people's judge" who coined the phrase "cash flow is the lifeblood of the industry". But this is a point that the Government is appearing to take to heart following the Farmer Review of the UK Construction Labour Model "Modernise or Die" and the predictions of economic doom for a post-Brexit UK.
In a move to keep the supply chain solvent and payment practices under scrutiny (and in addition to the publication of new guidance of the reporting of payment practices), the Department for Business, Energy and Industrial Strategy (BEIS) has issued two new consultations: Retention Payments in the Construction Industry, and 2011 Changes to Part 2 of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act).
Retention money is traditionally withheld from payment due to contractors by parties up the supply chain as security until the contractors' works are complete and the defects rectification periods have expired under their building contracts. If a contract is silent on the matter, retention is to be repaid within a reasonable time following completion.
On the one hand, such security can be viewed as a sensible incentive to contractors to honour their contractual obligations in full, whilst giving the employer use of this money if they fail to do so. On the other, retentions can be seen as part of a regime which enables unscrupulous employers to keep hold of money already earned and provides the opportunity to further squeeze small businesses.
In the Ministerial foreword to the consultation on cash retentions, Lord Prior comments that "there is evidence that some payment practices prevalent in the construction industry are a barrier to investment, productivity, improvements and growth". He indicates that there may be scope for improvement to prevent late and non-payment of retentions, particularly in the case of small businesses.
The consultation is relevant to any party to a commercial construction contract and is also of interest to adjudicators, arbitrators and lawyers. It does not apply to residential occupiers.
The consultation refers to independent research conducted by Pye Tait (BEIS Research Paper no. 17). This research has identified key issues such as: the loss of retentions due to employer insolvency; payment of retentions conditional on performance under other contracts; unjustified late payment of retentions and the need to consider alternatives to cash retentions (such as a deposit scheme or the holding of retentions on trust). The impact assessment accompanying the consultation also looked at other sources of information such as the prompt payment and construction supply chain charter, the Government Construction Strategy: 2016/2020; project bank accounts and the Public Contracts Regulations 2015.
The consultation focuses on existing measures for retentions, late and non-payment and possible caps in terms of both the length of time retention is held and the value of the retentions, as well as alternatives to retention.
Consultation on the Construction Act
The second of the BEIS consultations on payment practices is intended to review the implementation of the Construction Act.
The Construction Act contains statutory rules on the rights to refer disputes to adjudication; interim payments and suspension of works for non-payment. It also prevents the withholding of monies unless a pay less notice has been served and prohibits "pay-when-paid" clauses.
In 2011, Part II of the Construction Act was overhauled to tighten up the calculation of the due date for payment, the requirements in relation to payment and pay less notices, adding in a number of new definitions and to apply the legislation to oral as well as written contracts. There were also changes in relation to the right to suspend works for non-payment and provisions on adjudication.
Following the Government's promise to conduct a review of the 2011 changes within five years of its implementation, the consultation seeks information on the effectiveness of the 2011 changes to increase transparency in the exchange of information relating to payment; encouraging parties to resolve disputes by adjudication (with a particular emphasis on the costs of adjudication) and to strengthen the right to suspend.
Both consultations close on 19 January 2018. Replies can be submitted via the BEIS Citizen Space webpage "Purpose of Consultation". Alternatively, a response form can be obtained directly from BEIS.