Construction insolvency drives multi-million cash retention losses
Construction firms entering insolvency have led to more than £700 million of cash retention losses in just three years, the Specialist Engineering Contractors’ Group has claimed.
The SEC described the figures – taken from research by Pye Tait on behalf of the Department of Business, Energy and Industrial Strategy – as “shocking” and said they are far higher than their own estimates.
Group chief executive Rudi Klein said that the majority of the finance will have been lost by small businesses, adding that it “represents a scandalous and continuing drain on the scarce resources of SMEs in the construction industry”.
SEC Group is keen to see cash retentions kept in independently run retention deposit schemes in order to provide greater security for those in the sector.
Mr Klein has called for government intervention and the report represents part of a government review into retentions, with a focus on the benefits, costs and impacts that they have on the construction sector.
Levels of insolvency in construction are reportedly on a par with the average in the manufacturing sector, although the amount of retention money being lost as a result of contractor insolvency is disproportionately higher.
A retention is a sum of money that is kept aside from the payment for construction projects in order to mitigate the risk that the project is either not completed, or done to the required standard.
This safeguard is usually a certain percentage of the total contract and are typically held first by the client that employs the main contractor, before filtering down into all sub-contracted work in a project supply chain.
A further issue of businesses in the construction sector according to the Retentions in the Construction Industry report is that the majority of firms hold retentions in their main bank accounts, meaning they lack protection from upstream insolvencies.
The Federation of Master Builders has also said that clients that do not pay on time are threatening the future of smaller construction firms.
Three quarters of small and mid-sized building firms reported that client issues had hampered business, with a third claiming they were regularly paid beyond the usual 30 day standards.
Around one in four businesses said they had to wait more than four months for payment, with 30% of firms then paying their suppliers late as a result.
This creates cash flow issues throughout the sector and limits growth, with one in ten firms entering insolvency as a result of late payment problems.
By Phil Smith