Jaga is delighted to be backing an initiative by H & V News magazine called ‘Time for Change’. The first issue on its agenda is to change the situation relating to retention funds within construction contracts – a problem affecting contractors and small businesses throughout the building services and construction sectors.
In any line of work, if you do a good job you expect to be paid the agreed amount for your efforts. Too often, businesses are withholding or delaying payments to contracting companies for their work, quite simply because there is nothing to stop them doing so.
It is hugely damaging to the image of the industry, and is a risk to the financial security of many businesses throughout the supply chain.
Squeezed margin levels that are commonplace today mean that delaying or withholding these funds can be the difference between a profit and a loss on a project. Whilst they exist to ensure contractor properly completes what is required of them in the contract, it can be exploited to the detriment of the contractors themselves.
Half of the retention – which is usually around 5% of the amount agreed in the contract – is released upon ‘practical completion’, or when all the work specified in the contract has been completed.
The remaining half however, is held during the ‘defects liability period’, whereby the client can report any defects to the contractor that have resulted directly from their work – the contractor is then obliged to resolve the defects in question. The issue is that this defects liability period often lasts up to 12-months, and the money itself is generally in a separate bank account under the control of the client. Any interest paid on the account is kept by the client.
For sub-contractors, including M&E contractors, the situation can be even worse. Retention is released by the client to the main contractor, who is then responsible for making the payment to the sub-contractor. The process for this is often overly complex and time-consuming.
This obviously has ramifications for businesses, particularly if the struggle results in court proceedings and costly legal bills. Many small businesses simply do not have the time or resources to fight their corner alone.
There appears to be no reason why retention funds within contracts should not be placed in trust funds. A comparable example would be that landlords are legally obliged to place tenants’ deposits with a recognised agency – why should small contracting businesses be denied the same right?
The issue is widespread beyond our industry though – a government report by Vince Cable in 2013 suggests that 85% of small businesses have experienced late payment in the past two years, and that the outstanding owed figure exceeds £30bn. It is an overarching national economic problem, but in our industry at least, we can make a change.
We need to resolve long-established issues that are hampering the efficiency of building projects. Financial squabbling is nothing new in the industry, but we need legislative guidance to ensure fairness is enforced.
Unfortunately, change will not occur unless rules are tightened. The only way rules will be tightened will be by taking it right to the top – a parliamentary debate that drives legislative change.
For this parliamentary debate to happen, 100,000 signatures are required – by signing the online e-petition, we can begin the process of righting this long-standing problem. The sooner we collectively tackle retentions, the sooner the Time for Change can move on to the next issue and help drive the industry forward.
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