The Problem with Retentions

A retention is a percentage of the value of a construction contract which is held back by the client as an assurance that the project will be completed and as a safeguard against defects which may subsequently develop and which the contractor or subcontractor may fail to remedy. Retentions can be held first by the client employing the main contractor and this typically filters down into all sub-contracted work on the project throughout the supply chain as the contractor applies retentions to its own subcontractors.

It is not uncommon for a tier 1 main contractor to have 50-70 tier 2 subcontractors on a project.  In complex projects, it can be that tier 2 businesses subcontract in turn to a tier 3, of possibly 30 subcontractors for a total of 1,800 companies in tier 3 of a project.  Government estimates the total amount of money being held in retentions in a given year at around £4.5 billion.

Retention payments are normally split into two halves.  The first half is paid to the subcontractor when then works are completed - termed 'practical completion'.  The second half is then held back for what is known as a 'defects liability period', typically lasting 12 months.  During this time the subcontractor is expected to return to site to put right any problems that have been identified with their work.

The amount of the retention varies depending on the type of contract, its value and the industry sub-sector, but the average value is 5% of the contract value. 

Concerns have been expressed by many in the construction supply sector chain that unjustified late and non-payment of cash retention has serious negative impact on small businesses.  Independent research commissioned by the government confirms this view:

• Delays in paying retentions appear to be commonplace, with average delays of several months.
• The delays in payment of retentions get longer the further down the supply chain a business operates.
• Subcontractors further down the supply chain were also much more likely to be affected by non-payment of retentions
• Amendments to the Construction Act made in 2011 made it unlawful for a contractor to withhold retention payments from a subcontractor from one contract based on their performance on another contract.  However, the research found evidence that a number of businesses continue to link the payment of retentions to the subcontractors performance on other contracts.
• Subcontractors are exposed to the risk of upstream insolvencies, where a business in the supply chain above them goes insolvent.  Retention money is not ring-fenced, but instead is kept in the general bank account, so the subcontractor would become an unsecured trade creditor like any other, with little prospect of recovering the money.
• Some retentions are set at an onerously high rate (well above the average value of 5%), and for unreasonable durations on the defects periods

In late 2017, government launched an industry consultation on the practice of cash retention under construction contracts.  The consultation aims to

• Assess the efficacy of existing measures aimed to help with late payment, measures such as the Prompt Payment Code and Construction Supply Chain Charter
• Measure how much late or non-payment of retention monies is for genuine reasons, and how much is not justified
• Find out how big a problem it causes when companies go insolvent while owing retentions
• Assess how widespread is the practice of withholding retentions for one contract based on obligations under another contract

Government is also considering some possible measures to help such as  a statutory cap on the amount of a retention and the length of the defects liability period and ring-fencing the cash held on retention.  Ring fencing could be achieved by having project bank accounts, retention bonds or escrow accounts, or a retention deposit scheme


If you operate in the construction industry and have been affected by late or non-payment of retentions, perhaps you should have your say by completing the consultation.  In the meantime, My Credit Controllers has a proven track record in helping subcontractors release unpaid retentions from clients.  Why not get in touch to see how we can help?

How to Find Out if a Company Has Gone Bust

New online service to check whether a company is still trading

http://www.mycreditcontrollers.co.uk/company-check.html

A couple of years ago, we wrote an article on the My Credit Controllers website sharing some tips for people that wanted to find out whether a customer that owed them money had gone into administration, liquidation or receivership.

In the article we described how to use the online search tools at Companies House and the London Gazette to get confirmation about whether a company is still trading or not.  It has become one of our most popular articles - clearly it's a real concern for businesses that are chasing for money when a debtor 'goes quiet' and stops answering the phone or responding to email - are they just avoiding you or are they really in trouble?

Companies House is  the ultimate authority for business information.  It is the archive of record for UK businesses. It has an excellent search tool and you can search for a company name and look to see what trading status for the company is currently held on file.  You can be really certain that if Companies House says a company is 'Dissolved' that it's gone.  Finished.  An ex-company.

The problem with Companies House information is that it can take months to update.  For example financial accounts relied upon by credit rating agencies do not have to be submitted until 9 months after the end of the financial year to which it relates.  The information here is accurate - eventually, but this is of little solace if you've been wasting your time chasing someone for payment when they went into liquidation months before.  You may even have missed your chance to register your debt with the Insolvency Practitioner looking after the case.

This is where the London Gazette comes to the fore.  The Gazette is the journal of record for the UK government and certain statutory notices are required to be published in it.  The Gazette has been digitised and all issues are available online with a search tool.

Included among the notices of government laws coming into force, appointments in the armed forces, and changes of coats of arms are notices of insolvency proceedings for businesses and individuals.  Insolvency practitioners are required to submit notices to the Gazette - for example announcing their appointment and dates of creditors meetings.  Applications to the court for a winding up order against a company and the outcome are also posted.

The Gazette is comprehensive and bang up to date - notices have to be placed within a short time period.  It's drawback is that for a non-specialist the interpretation of all the different insolvency notices can be difficult to understand.  The sheer variety of the topics the Gazette covers can also make searching a challenge.

It is for these reasons we came up with our new online  Company Check tool.  You simply start typing in the name of the company you are interested in and it searches Companies House to give you a pick-list of companies.  Select one of these (or if it's not on the list type out the name in full) and the online databases at Companies House and the Gazette are searched and the results from both analysed to produce a simple summary in plain english.   If you're worried about the trading status of a company - be they supplier or customer, why not give it a try?

Company Check - Online tool to check whether a company has gone bust

Extreme Debt Collection Methods

Some trainee debt collectors in action

I’m sure there are many pre-conceptions about how debt collectors work, or how an effective credit controller goes about making sure that payments come in on time. However, I can say with total conviction that the tactics employed by a group of unofficial money-lenders in China are not part of the MCC portfolio.

It was reported in The Telegraph, the FT, The Sun and a few other places, that some rogue money-lenders had hired older ladies from outdoor dancing classes who then used highly intimidating tactics to get borrowers to pay up. Several of them have been jailed for doing things like shouting through a megaphone outside the debtors house to humiliate them in front of their neighbours, carrying out beatings, or even stripping naked in front of the debtor in the street and implying a sexual assault had taken place. Though Chinese authorities eventually caught up with this gang, imprisoning many of them for long sentences, here in the UK the law is very strict on personal and company debt as we’ve written about before.

When pursuing overdue debts, here at MCC we recognise that we are bringing a contractual obligation by a customer back on track after its gone awry. The tactics will therefore be polite, unemotional and business-like, but with a clearly articulated end-game where the debt is paid off to our client’s satisfaction. The outcome is not in doubt, we are just determining how we are going to get there. So far, shouting in the street, violence, or taking your clothes have not been necessary for us to collect millions for our clients. I, for one, am very pleased about that.

Lessons in Invoicing from the Milkman

For many years, we've had fresh milk delivered to our doorstep at home each morning.  I guess we like the idea that we were helping to keep a tradition going, together with the feeling that we were supporting a local small business.  No doubt the milk comes from farms near Chernobyl and the company is owned by a tax-dodging multinational, but it made us feel good.

I suppose it did all feel a bit antiquated, leaving handwritten messages when we were going away and cheques for payment rolled up and stuck in the top of an empty bottle for the delivery person to collect, so I wasn't surprised when the dairy wrote to us saying that they wanted to move to receiving payment of their invoices by bank transfer.

Unfortunately, when the next invoice arrived, it was obvious that this company hadn't read the My Credit Controllers article on how to design your invoice to get your money in quickly.  The invoice clearly stated that ALL PAYMENTS SHOULD BE BY BANK TRANSFER, but the crucial information was missing - the details of the bank account to which they wanted a remittance made.

Of course, this isn't make or break, it just slows down payment from people who want to pay you and perhaps gives cover to others who want to delay payment as long as possible.  The real clincher , and what unfortunately lost the company a customer, was that the office didn't reply to repeated requests for the bank details.  As the weeks went by, we became more and more embarrassed about the money owing and eventually just cancelled the deliveries and left a cheque for the total outstanding.

So why not learn from the example of my Milkman?  Why make it difficult for your customers to pay you when it's so easy to make it simple?  Have a look at our guide to designing an invoice template and make sure your business is doing everything possible to get paid on time by customers.

The Victoria Small Business Commissioner

The 'Australian Model' for Helping Small Business Collect Payment from Customers

With its announcement of a 'Small Business Commissioner' in 2015, a post that has yet to be filled (the job is still open for applications if you're interested), the UK government is following a model that was pioneered in Australia.  How does the system work in Australia, and how successful has it been?

The first Small Business Commissioner in Australia was created in Victoria with the passing of the Small Business Commissioner Bill in 2003.  The Commissioner was to be dedicated to
promoting a fair and competitive market environment for small business.

The Victorian Small Business Commissioner (SBC)  lists its goals as:

• promoting informed decision-making;
• mediating business-business, business-government, retail tenancy, owner driver and forestry contractor, and farm debt disputes
• investigating complaints about unfair market practices;
• minimising disputes between small and large businesses.

Small businesses with an unpaid or disputed invoice can contact the SBC and request that it mediates between the two parties.   Mediation costs $195 per party per half day and is performed by qualified subcontract mediators.

The SBC has the power to issue a certificate to a party where the process has not been successful or where a party has refused to engage in the process.    Where a party has in the view of the Commissioner unreasonably refused to take part, details of the certificate may be published in the commissioner's annual report.  Hence there is a repetitional reason for businesses to positively engage with the process

In 2015-16 the Victorian SBC reports that it received nearly 2,000 cases of disputes.  Around 500 of these went to mediation, and 82% of these cases were resolved at mediation, without the need to progress to arbitration or litigation.

The success of the Victorian SBC has led to the establishment of Small Business Commissioners in New South Wales, Western Australia, South Australia and also nationally for Australia.

It remains to be seen how significant an impact on late payment, payment disputes and supply chain 'bullying' the UK Small Business Commissioner will have, but if the experience in Australia is anything to judge by, the sooner the government appoints the Commissioner and they can get on with the job, the better!

The Conservative’s pledges on prompt payment

Since the post on Jeremy Corbyn's speech to the FSB, we have been going through the manifestos looking for information on what the parties might do to enforce or encourage prompt payment practices.

The Conservative manifesto says…

“we will use our buying power to ensure that big contractors comply with the Prompt Payment Code both on government contracts and in their work with others. If they do not do so, they will lose the right to bid for government contracts.”

That sounds like a commitment to lead by example and that a Conservative government would only deal with companies that play fair, but makes no promises on legislation or support for SMEs when their credit terms are abused. The Prompt Payment Code (http://www.promptpaymentcode.org.uk/) is administered by our trade body, The Chartered Institute of Credit Management, and gives companies confidence when dealing with its signatories that they won’t be unfairly treated. At My Credit Controllers we support and encourage people to sign up and abide by its terms, but as a voluntary scheme it would be good if there was a more effective ‘stick’ in law to beat those who wish to exploit SMEs.

Ready, steady….

In a speech to the Federation of Small Businesses last week, opposition leader Jeremy Corbyn pre-empted the announcement of a snap election by making some early policy pledges. Of particular interest to us at My Credit Controllers (MCC), Mr Corbyn highlighted the threat to small businesses caused by systematic late payment. He pointed the finger at large companies who were using credit with small suppliers as a means of funding their cashflow requirement, while at the same time threatening the very existence of those suppliers. Mr Corbyn said “Cash is king for any business, and big companies are managing their cash by borrowing – interest free - from their suppliers,” . Further adding that “It’s a national scandal. And it’s stopping businesses from growing and causing thousands to go bust every year. It kills jobs and holds back economic growth.”

He also said that some £26 billion is being withheld in late payments and that this contributes to the failure of 50,000 businesses each year. He goes on to promise that any company bidding for public sector contracts under a Labour government will be bound to pay its suppliers within 30 days. The party will also consult on a system of “binding arbitration” to resolve late payments disputes.

Here at MCC we support any move to legislate for fairness in paying suppliers according to agreed terms, but in the meantime it can always be a struggle to deal with these unfair and threatening practices. That was one of the main motivations for setting up MCC; helping SMEs get what is rightly theirs. Lets see what the other parties have to say on this issue in the run up to the June election.

Does the Late Payment of Commercial Debts Act Apply in Scotland?

Our article explaining how businesses have a legal right to add interest and compensation to unpaid invoices is one of the most visited pages on the My Credit Controllers website.

Recently we received an enquiry asking whether the legislation applies the same way in Scotland as it does in England and Wales.

The simple answer is 'yes' - the interest rate you can apply, the compensation payment and the ability to add 'reasonable recovery costs' are just the same in Scotland as elsewhere in the UK.

You can check this yourself using the legislation.gov.uk website.

The original legislation that applies is the Late Payment of Commercial Debts (Interest) Act 1998. This law was first created in 1998 by the government in Westminster, but has been amended over the years - in 2002, 2013 and 2015.

Amendments from 2002 onwards were made separately by the UK parliament and by the Scottish Government, but it seems that the amendments were coordinated so that the legislation in effect remained the same both north and south of the border.

If you open up the latest version (revised), and tick the 'Show Geographical Extent' check-box on the left side of the page you'll see at the top of the page that the legislation applies in all the devolved regions of the UK.  The image below shows the marked up page with the geographical extent shown and notes to show which parts have been amended by subsequent regulation.

So, yes, adding interest to overdue commercial invoices works just the same in Scotland, so get on over to our late payment interest calculator to work out how much interest and compensation you should add.

Welcome to the My Credit Controllers Blog

We will be writing blogs on issues relating to getting paid on time by your customers, government policy in this area, and best practice on how to manage your cash flow and...well anything that interests us.

We hope you enjoy it.  Please check back!

The My Credit Controllers team.