Property and construction experts have warned about the potential impact of a proposed ban on retention payments, a sum withheld from a contractor to ensure project completion, as part of a government clampdown on late payments to small businesses.
Labour said the reforms were the “toughest crackdown in 25 years” and would tackle the scourge of late payments, which it estimates costs the UK economy £11bn a year and forces 38 UK businesses to close every day.
The changes will create the strongest late payment laws among the G7 nations, with the threat of larger penalties and enhanced powers for the Small Business Commissioner to investigate poor payment practices.
The proposals include a 60-day cap on payment terms for all large firms paying smaller suppliers. A mandatory interest rate on late repayments set at 8% above the base rate will also be introduced for all commercial contracts.
The government is also proposing to ban the withholding of retention payments under the terms of construction contracts.
While efforts to protect SMEs have been generally welcomed, Melanie Leech, chief executive of the British Property Federation, warned that the proposals could “undermine the push for quality” in the construction sector and lead to poor-quality buildings.
“We support reform to prevent genuinely unjustified late payments, but a complete ban on their use is a sledgehammer to crack a nut and will undermine the ability of those funding new construction to ensure that buildings are defect-free.”
Daniel Cahsmore, partner in law firm Osborne Clark’s construction and engineering disputes team, said the proposal to ban retention payments “would come as a shock to many”.
He added that retention payments are an “important safeguard against SME insolvency”, as well as a commercial tool, and said a ban was likely to lead to more disputes.
However, others welcomed the planned reforms, with Mark London, senior partner and head of construction at law firm Devonshires, stating that the move “will no doubt be very well received by smaller contractors”.
He added: “Cash flow is a critical factor for SMEs in all industries, but construction perhaps most of all.”
However, London added: “It’s the toughest crackdown in 25 years, but is likely to see other protections and mitigations emerge in response.”
He also said the measures were largely targeted at addressing the poor practices of bigger firms, and if fines and investigations were not levelled sufficiently, businesses that could afford to pay might end up “coughing up for a fine” instead of making meaningful changes to the way they work.
David Crosthwaite, chief economist at BCIS, added his support to the proposals, stating that late payments have “long been a pressure point in construction supply chains, particularly for SMEs and specialist contractors”.
He added: “The government’s proposed reforms represent a positive step towards improving payment discipline.”
However, he warned that the government would need to fill any gaps left by a ban on retention payments, which have “traditionally played a role in managing defects liability and quality assurance”.
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