Changes afoot in the construction industry?
6 April 2018
Earlier this year, the Department for Business, Energy and Industrial Strategy (BEIS) closed submissions on two important construction industry issues – how well the Construction Act was working, and the impact of cash retentions.
In the foreword to the consultation on retention, Lord Prior of Brampton (then Parliamentary Under Secretary of State at BEIS) recognised that retentions can be a barrier to investment, productivity improvements and growth. It is likely that many will agree, especially SMEs which are the lifeblood of the industry but who are disproportionately affected by the effect of cash tied up in retentions. The issue of losses from retentions became even more under the spotlight following Carillion’s demise around the time this consultation closed, making it likely that input on the consultations was greater than it might otherwise have been.
Among the other issues noted by BEIS were that some employers make payment of the retention conditional on the performance of obligations under another contract, despite the provisions of the Construction Act preventing conditional payment obligations, and the fact that late payment of retention (or non-payment) was a significant issue for some contractors, with the delays increasing further down the supply chain. In our experience, it can be difficult for payees to unlock retention payments which, while often small amounts, rendering recovery less viable, make up a significant proportion of many firms’ profit.
To address this, the consultation considered alternatives like project bank accounts, escrow accounts, and retention and performance bonds. Perhaps the most interesting proposal was for a retention deposit scheme, administered by an independent ombudsman in a similar way to the tenancy deposit scheme which operates for residential lettings.
The Construction Act
It is nearly twenty years since the Construction Act came into force on 1 May 1998, and well over six years since the amendments brought about by the Local Democracy, Economic Development and Construction Act 2009 were implemented. In that time the Act has become familiar for all working in the industry (or at least, most…).
This consultation considered three main issues.
- It looked at the effectiveness of the 2011 changes, including whether adjudication was accessible and whether measures introduced to improve the clarity and transparency of the payment framework had worked.
- It asked whether the Construction Act remained fit for purpose, in particular whether the payment framework introduced in 2011 still worked and whether adjudication was an effective means of resolving disputes.
- It queries whether adjudication was affordable, and whether its costs prevented its use.
In our experience, while the Act is far from perfect and there are many nuances which still, despite its longevity, remain to be ironed out, it does a good job of regulating payment and disputes in the industry. The 2011 changes, in particular, have now become second-nature to most in the industry, and while clarity on some issues would be welcomed, wholesale change risks a further period of uncertainty for the industry which may not be welcomed.
Whether either consultation will see meaningful change to the industry remains to be seen, and there are no timescales on a government paper detailing responses to the consultations. However, the fact that BEIS opened both consultations demonstrates that consideration is being given to some of the major issues affecting construction firms, and the problems they face.
We will report on any changes that follow on either the Construction Act or retention in due course. In the meantime, we would love to hear your opinions on how either issue affects you – or on any legal or commercial issues that you think require greater industry discussion.
The content of this article is for general information only. If you would like to discuss any of the issues raised in this article further, please contact a member of Birketts’ Construction and Engineering Team. Law covered as at April 2018.
This article is from the spring 2018 issue of Cornerstone, our newsletter for those working in the construction industry. To download the latest issue, please visit the newsletter section of our website.
To keep up-to-date with the latest news, legal updates and seminar information, please register and select the areas that are of interest to you.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at April 2018.