Councils failing to monitor payments

UK: Local authorities have been accused of a lack of guidance on best practice and failing to oversee payment performance in their supply chains.

An FoI request by the Specialist Engineering Contractors’ (SEC) Group has revealed that the majority of local authorities deduct cash retentions with most using the cash retentions to bolster their working capital or fund other activities. They are not checking to ensure their main contractors are releasing retention monies on time, or at all, and most are failing to enforce 30-day payment clauses.

The SEC is calling on construction procurers in local authorities to protect retention monies belonging to SMEs in their supply chains.

The survey reveals that almost 77% of local authorities deduct a 5% cash retention, with 16% of those deducting cash retentions in excess of 5%.

The cash retentions are being used by 53% of councils to bolster their working capital or fund other activities, including 6% of councils which invested them in the overnight money markets. While 22% of councils do not deduct cash retentions, only four of them (1.5%) insist that their main contractors do not deduct retentions from the supply chain. In effect, 80% of councils do not pass on any contractual requirements to their main suppliers or check on whether main contractors are releasing retention monies on time, or at all.

It was also revealed that over 62% of councils are failing to comply with legislation requiring them to ensure that 30-day payment clauses are included in sub-contracts and sub-sub-contracts, although 22% said they did intend to do this.  The SEC points out that these clauses also apply to retentions which must be released within 30 days of becoming due for release.

Only 12% of councils have put in place some monitoring and reporting arrangements that sub-contractors are paid within 30 days, although 17% said that they were considering to implement some monitoring arrangement in the future.

Commenting on the survey results, small business commissioner Paul Uppal said that public procurement can drive positive change across the supply chain. He added: “Local authorities should consider how their projects can support small firms in their areas by insisting on fair treatment of their supply chains – ensuring that 30-day payment clauses are inserted and observed in supply chain contracts and that retentions, if held, are ring-fenced and released promptly across the supply chain.”

SEC Group president Lord O’Neil said that SEC had repeatedly asked government to take action on cash retentions by adopting the Peter Aldous Bill to protect the supply chains’ cash. “When local authorities hold retentions from their main contractors, the monies are de facto guaranteed – they won’t go bust. When the main contractor holds retentions, there is no such guarantee for their sub-contractors.”

SEC Group is asking local authorities to adopt guidance on the protection of retentions in their supply chains. They should ask contractors on their approved suppliers’ lists to include a contract clause; this should protect retentions main contractors may hold across their supply chains in the event of their insolvency.

SEC Group is also asking the government to strengthen the Public Contract Regulations by making it a statutory requirement that all suppliers will be paid within 30 days on public sector projects. It also asks that public bodies should have the option to make direct payments to sub-contractors. In addition, it wants to see a yellow/red card system that bars firms from working for the public sector for up to three years where they have not complied with paying within the statutory 30 days.