Small and medium-sized enterprises (SMEs) in the construction sector are falling victim to payment abuse and deserve better protection, a leading trade association has warned.
In its submission to the Scottish Government’s Economy, Energy and Fair Work Committee, which is undertaking an inquiry into the construction sector, SELECT took the opportunity to make the case that reform of the payment system should include provisions to ensure that retention monies are protected in trust.
Retentions are monies withheld from contractors by clients to ensure that all work is completed properly. The money is meant to be paid back in full once work is finished and confirmed compliant with industry standards.
However, Alan Wilson, Acting Managing Director of SELECT, said retentions are actually often used to boost the cashflow of the paying party.
“Retentions were not deducted from Carillion when it was working for the Defence Infrastructure Organisation on the Faslane works, but Carillion was deducting retentions from its supply chain,” said Mr Wilson.
SMEs regularly report late release or non-payment of cash retentions, which is a source of frustration across the industry. In addition, these monies are always at risk of not being paid if there is insolvency further up the supply chain.
“Research carried out by the UK government revealed that over a three-year period to 2016, firms in the industry were haemorrhaging almost £1m worth of retentions per working day due to upstream insolvencies,” Mr Wilson said. “Retentions legally belong to the firms from whom they have been withheld.”
“SMEs often expend vast sums on training, design, manufacture, assembly or installation before receiving their first payments. Unlike many other countries advance payments or, alternatively, any form of security for payment for this up-front investment is rarely available.” said Mr Wilson.
Members of SELECT carry out a range of design, manufacturing, testing and commissioning work. They have a collective turnover of approximately £1bn and provide employment for 15,000 people.