Philip Harris, a construction solicitor with Wright Hassall, looks at possible side-effects of the new Payment Charter’s move to ban retentions.
Retention, the dirty word of the construction industry, could soon be a thing of the past, writes Philip Harris. In a bid to make the industry “fairer” the government has launched its long-awaited Supply Chain Payment Charter. Heralded as the saviour of the subcontractor, the Charter plans to abolish retention pots, freeing up otherwise cordoned-off monies for the benefit of the little guy.
Call me cynical, but with less than 12 months to go before the next general election, it does seem to be rather strategic for the government to get its hard hat on at this late stage.
But okay, let’s give them a chance – anything that gets a subcontractor’s well-earned money into their back pocket must be a good thing, right?
The construction industry has always suffered from a lack of trust. Where else is it acceptable to say: “I’m happy for you to work for me, but just in case you screw up, I’m keeping 5% of the sums due to you until 12 months after you’ve finished the job.” If that was any other profession, I think the government would have acted before now. Pay on time, pay what is properly due and workers will often be happier and work far harder for you.
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Makes sense, but for a contractor who has lost their metaphorical comfort blanket, we are left wondering: what will fill the gap? The contractor needs some way to force a subcontractor to remedy any defective work, or alternatively, hire somebody else to solve the problem. It may be that we see creative contract drafting to tighten up termination clauses in respect of deficient work, allowing third parties on site to carry out remedial work at the subcontractor’s expense. We are likely to see a rise in disputes over non-payment of invoices and a hike in the court’s lists, as contractors argue for specific performance of their construction contracts.
The Oxford English dictionary defines “Charter” as a written statement of the rights of a specified group of people. It may surprise you then, that your rights as a subcontractor under the Charter will not have legal protection.
However, it is hoped that the Charter will pave the way for a more level playing field between contractor and sub-contractor. Going forward, subcontractors should be able to play the market and only work with contractors who have signed up to the fairer payment terms under the Charter. Good news, just don’t celebrate just yet – retentions will be sticking around until 2025.
The Charter immediately commits clients and contractors to pay all suppliers within 60 days. This would then be reduced to 45 days from June 2015 and to 30 days in January 2018.
Furthermore, the Charter is to be read in conjunction with the Construction Act 1996 and with the Late Payments of Commercial Debts regulations. In essence, if the payment terms in the contract impose periods over those set out above, the clause can be struck down as unfair.
It is a long established phenomenon that more businesses go bust when the economy is coming out of recession than during it. Now that the construction industry is finally emerging from stagnant growth, it is important to protect smaller suppliers who may not have the resources to respond to delays in payment and who often work to the very edge of their budgets.
And as a final farewell wave from the Charter, signatories will commit to “…adopt a transparent, honest, and collaborative approach when resolving differences and disputes”.
Great in theory, but difficult to assess in practice. We wish the Charter the very best of luck.
