Research by the Specialist Engineering Contractors’ Group based on Freedom of Information requests among English local authorities highlights a lack of oversight by councils of payment performance along the supply chain.
A majority (77%) of local authorities deduct a 5% cash retention on building projects and 16% take a larger cash retention, according to data compiled by the SEC Group, which represents the largest sector in UK construction by value.
Around half use these retentions to top up their working capital or fund other activities, it found.
Most councils (80%) do not pass on any contractual requirements to their main suppliers or check whether contractors are releasing their retention monies to sub-contractors.
Other problems identified by the research include late payment to contractors. Six out of ten (62%) councils were failing to comply with legislation to ensure that 30-day payment clauses are included in sub-contracts and sub-sub-contracts.
These clauses also apply to retentions, which must be released within 30 days of coming due.
Commenting on the findings, small business commissioner Paul Uppal said: “Local authorities should consider how their projects can support small firms in their areas by insisting on fair treatment of their supply chains – ensuring that 30-day payment clauses are inserted and observed in supply chain contracts and that retentions, if held, are ring-fenced and released promptly across the supply chain.”
Lord O’Neil, SEC Group president, said that following the collapse of the construction giant Carillion earlier this year, MPs and peers were becoming anxious about the role of SMEs in construction. He urged Parliament to adopt a bill to protect supply chain cash.
“When local authorities hold retentions from their main contractors, the monies are de facto guaranteed – they won’t go bust. When the main contractor holds retentions, there is no such guarantee for their sub-contractors,” he said.
Among other government actions the SEC Group wants is the introduction of a statutory requirement that all suppliers are paid within 30 days on public sector projects, and an option for public bodies to make payments direct to sub-contractors.
Firms that fail to comply with 30-day payment terms should, after warnings, be barred from working for the public sector for up to three years, the group added.
