---

Construction Industry: Cash Retentions

It is a pleasure to serve under your chairmanship, Mr McCabe. I thank the hon. Member for Kilmarnock and Loudoun (Alan Brown) for initiating this important debate. I also thank my hon. Friend the Member for Waveney (Peter Aldous) for his excellent contribution, and thank the right hon. Member for Warley (John Spellar) and my hon. Friend the Member for Kettering (Mr Hollobone) for their interventions.

The construction industry is vital to our future prosperity. Its turnover in 2018 was £413 billion, it accounts for 9% of the UK economy and it employs around 9% of the UK workforce, which is about 3.2 million people. The industry also builds and maintains our places of work, our schools, our hospitals, our economic infrastructure and, of course, our homes.

My hon. Friend the Member for Waveney asked me three questions. In answer to the first, which I will refer to as the Harrington question, the Government are committed to tackling the problems of late and unfair payment that burden businesses. That is why we have introduced a number of measures, including requiring large firms to report on their payment performance, the power to exclude firms that consistently pay late from Government contracts, and the prompt payment code.

Prompt and fair payment has long been a problem within the construction industry. Payment has traditionally cascaded down supply chains, as we have heard from a number of colleagues. As a result, smaller firms in the supply chain carry a disproportionate amount of project and payment risk, through late or non-payment; my hon. Friend the Member for Kettering gave Griffiths Air Conditioning and Electrical Contractors as an example of that.

Cash retention is an example of a payment practice vulnerable to both insolvency and abuse. Many construction contracts include provision for cash retention. Holding retention money is a long-established way of providing insurance against defects in an industry that is highly fragmented and operates on a project-by-project basis and in which defective work can be common. However,

the practice does not offer protection to contractors against the loss of their retention due to upstream insolvency, as we have heard, including in the examples given by the right hon. Member for Warley. It can be subject to late, partial or non-payment for the supply chain. I reassure you, Mr McCabe, that Ministers acknowledge that there is a strong case to reform the practice of cash retentions, which is why we committed to review retention payments.

It may be helpful to outline the work that my Department has undertaken on this issue to date. We have consulted on the introduction of a retention deposit scheme, and produced an independent research paper on the issue, and we have looked at other solutions to the abuse of retentions. Following the consultation, we have worked with firms in the industry and with public and private sector clients to gather further information and to discuss possible solutions.

Further work has been undertaken to analyse the design, operation, costs and wider implications, including costs for the industry, of both a retention deposit scheme and a statutory ban on retentions. That work included ministerial roundtable meetings, which my hon. Friend the Member for Waveney mentioned, with key representatives from across the sector and from clients to tackle the abuse of retentions. While most people in the construction industry favour change, there is no consensus on the solution.