Waiting for payday: the human cost of retentions

Please note: this article was written in January 2020. It is focused on a roundtable discussion that took place in December 2019.

“Nobody would accept it if a salaried person didn’t get paid on time.”

Just before the new year, at a roundtable on late payment hosted by ECA in collaboration with Building magazine, this comment from Lorence Nye, senior policy advisor at the Federation of Small Businesses, was met with unanimous agreement.

The panel, made up of industry experts with direct and indirect experience of the effects of unfair payment practices, also agreed that the very structure and culture of the construction industry not only allows, but facilitates, this problem.

Who was at the table?

• Chair: Thomas Lane, group technical editor, Building

• Rob Driscoll, director of legal and business, ECA

• Paul Uppal, former small business commissioner

• Tessa Ogle, managing director and chief executive, Electrical Industries Charity

• Hugh Gage, founder, Prompt Payment Directory

• Colin Smith, director, Payapps UK

• Mark Bodger, strategic partnership director, Construction Industry Training Board

• Heather Beach, founder, Healthy Work Company

• Stuart Driscoll, managing director, Parker Technical Services

• Stuart Smith, director, Stromtechs

• Lorence Nye, senior policy advisor, Federation of Small Businesses

Changing the culture

“We have to get to the point where people see [late payment] as an issue like the gender pay gap… not part of the rough and tumble of business,” said former small business commissioner Paul Uppal.

A lot [of work] is done on the basis of a handshake and goodwill

The notion that, as Mr Uppal describes, late payment is simply a part of doing business, has proven particularly harmful. While late payment is common in all areas of the economy, the construction sector is a notoriously poor performer. ECA’s own research has shown that payment terms of 60 days to its Members and above are the norm – with some clients regularly taking longer than 100 days.

Part of this is to do with the industry’s approach to contracts. “A lot [of work] is done on the basis of a handshake and goodwill,” said Mark Bodger, a strategic partnerships director at the Construction Industry Training Board (CITB). “That means that, at the end of a job, when money is tight and the client has reached the end of their budget, [they] might say, ‘I didn’t think it would come to this much.’”

This seemingly impenetrable culture is, however, showing some signs of changing. Rising insolvencies and better mental health awareness (industry surveys clearly link poor payment to poor mental health) have begun to shift attitudes and spur action. Among the biggest of these efforts was the Aldous Bill for the ringfencing of retentions, which was put forward in the last parliament.

Demolishing retentions

A retention is the proportion of money held back by a client or larger contractor, should they need to use it as collateral later on. This money is used to persuade the contractor to correct any defects or mistakes that may have come to light after the contract has been signed off.

Although the practice of retention can make sense in theory, it was put in place to help prevent malpractice and protect the client from cowboy contractors. However, there is nothing in place to protect the contractor from late or withheld (retained) payments.

The practice has been widely abused and has caused many problems to businesses in the supply chain, and their employees.

The human cost

An industry-wide survey carried out by ECA and BESA last year revealed that nine in ten small business owners have suffered from mental health issues as a result of the stress of unfair or late payment. Almost half were found to have had to suspend their own salaries, and some were even forced to pay their own employees late.

This data clearly shows the truly devastating effects late payment has on the lives of business owners, their staff, their family and their wellbeing. It has also lifted the lid on the industry’s self-harming commercial behaviour. Speaking candidly, I have had clients crying over the phone about the state of their business and the impact it is having on their home life.

Nine in ten small business owners have suffered from mental health issues as a result of the stress of unfair or late payment

We mustn’t forget that, although mental health is now being taken more seriously when it comes to direct employees, there is still far too little being done. This is especially true for the extended supply chain which accounts for an average of 35 per cent of the workforce in an average of four to five tiers.

Public and private sector buyers 

Government is the UK’s biggest construction and maintenance buyer, and consistency in public sector would encourage prompt payment in the private sector. Yet while the Highways Agency and Crossrail have payment schemes in place, including project bank accounts, in education, reliance on retentions is still the norm.

Industry aspirations such as fire safety, quality design and construction, and whole life performance will be continually undermined by poor supply chain payment

The introduction of the Prompt Payment Code (www.promptpaymentcode.org.uk) has generally been welcomed as a positive, albeit voluntary, move. But is the Code strong enough to be effective? Firms who have been thrown out of it (quite publicly) have very soon been able to get themselves back on board, which calls the deterrent value of being removed for poor payment performance into question.

Backbone of the economy

The construction sector provides around three million jobs and contributes around £100 billion to the UK economy every year. Facilities management adds a further £122 billion. The sector is made up of around 300,000 businesses, an astonishing 99 per cent of which are SMEs.

Construction and FM together enable a further £540 billion in the wider economy. In other words, the UK could not prosper (let alone function) without this activity. Despite this, construction bears the brunt of every economic downturn. With notoriously low margins and high insolvency rates, payment problems will continue to be endemic in the industry and continually prevent it from investing in skills, technology and growth.

Industry aspirations such as fire safety, quality design and construction, and whole life performance will be continually undermined by poor supply chain payment.

That is, unless prompt payment becomes part of a sea change in construction, in the immediate future…