New legislation coming into force on 1 March makes it a legal requirement for qualifying companies in the construction industry to report on the proportion of retention monies that they withhold from their suppliers. Bal Manak, construction partner at Square One Law, takes a look at the regulations
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New legislation coming into force on 1 March makes it a legal requirement for qualifying companies in the construction industry to report on the proportion of retention monies that they withhold from their suppliers. Bal Manak, construction partner at Square One Law, takes a look at the regulations
It’s well known that the practice of employers withholding a retention can sometimes have a crippling effect on contractors and subcontractors. Thankfully, new legislation is set to come into force on 1 March 2025 making it a legal requirement for qualifying companies in the construction industry to report on the proportion of retention monies that they withhold from their suppliers.
The reporting requirements highlighted in the Reporting on Payment Practices & Performance (Amendment) (No. 2) Regulations 2024 will apply to financial years starting on or after 1 April 2025, with the aim of providing support for the supply chain (particularly SMEs) by improving payment practices in the UK and increasing transparency.
The regulations define a retention clause in a qualifying construction contract as “one that allows a party to withhold a certain percentage of payments for works, services or goods supplied under the contract, the contract sum, or an interim payment, until certain conditions for release are met”.
Jonathan Reynolds MP, the secretary of state for business and trade, has stated that these measures “will help increase transparency around retention policies and performance, and encourage improved payment practices”.
The new retention regulations will apply to companies that exceed two or more of the following thresholds on their balance sheet dates:
- A turnover of more than £36m.
- A balance sheet total of over £18m.
- More than 250 employees.
Adjusted thresholds apply if a company is a parent company as defined in the Companies Act 2006. Both a subsidiary company and a parent company must separately report if they each meet the relevant thresholds.
A company is not considered a qualifying company for the purposes of the regulations in its first financial year.
The retention reporting requirements will only apply to qualifying construction contracts
These are contracts for the carrying out of construction operations as defined in the Housing Grants, Construction & Regeneration Act 1996, ie those which are subject to the
statutory requirements as to payment and where the statutory right to adjudicate applies.
Developers, contractors, consultants and other entities procuring construction works and which meet the definition of a qualifying company must also comply with these reporting requirements.
A qualifying company that includes a retention in its qualifying construction contract must disclose the following information:
- A statement on whether retention clauses are included as standard for all qualifying construction contracts with suppliers, or only applicable to some qualifying construction contracts, or used solely with suppliers in specific circumstances, along with a description of those specific circumstances.
- A statement on whether a retention clause is only included if a contract exceeds a certain contract sum and details of that contract sum.
- A statement on the standard percentage rate used in retention clauses in qualifying construction contracts between the qualifying company and its suppliers, specifying the percentage/rate.
- A description of the practice of using retention clauses that are no more onerous than any retention clause in a qualifying construction contract between the qualifying company or limited liability partnership (LLP) and its client in that supply chain.
- A description of the mechanism or process for the release of retention monies, including the specific stages at which these funds will be released.
- A statement presented as a percentage ratio representing the overall value of monies deducted or retained pursuant to retention clauses between the qualifying company and its suppliers, compared to the overall value of monies deducted or retained pursuant to retention clauses between the qualifying company and its clients. (The regulations contain a formula for calculating this percentage.)
The name of the director of the qualifying company or LLP who has approved the reporting information must also be supplied. It is therefore important for that director to understand the relevant reporting requirements and to ensure that all information supplied is accurate and complete.
The report must be published within 30 days of the last day of the relevant reporting period. Companies that fail to report this information will face sanctions under the regulations. It will be a criminal offence by a business, and every director of the company or designated member of an LLP, if the business fails to publish the report with the necessary information within the 30-day specified filing period. These offences will be punishable on summary conviction by a fine.
The Department for Business & Trade has indicated it would encourage businesses to comply with the requirements before seeking prosecution.
Fair Payment Code
The government has also launched the new Fair Payment Code to replace the Prompt Payment Code. This further seeks to improve access to cash and ensure timely payments by:
- Ensuring that large companies adhere to specific payment terms when dealing with smaller businesses to ensure that invoices are settled within a reasonable timeframe.
- Requiring businesses will need to publicly report their payment practices.
- Providing small businesses with resources and support to manage their cash flow more effectively and navigate financial challenges.
- All businesses can apply to join the code by applying for a Gold, Silver or Bronze award, depending on their payment practices.
- Gold is given to those companies paying at least 95% of all invoices within 30 days.
- Silver is given to those paying at least 95% of all invoices within 60 days, including at least 95% of invoices to small businesses within 30 days.
- Bronze will apply to those paying at least 95% of all invoices within 60 days.
Every business granted an award under the code also agrees to follow and abide by the code’s principles of being “clear, fair and collaborative” with their suppliers. The awards will last for two years, after which businesses will be required to reapply.
A supplier can notify the Small Business Commissioner (overseeing the code) about award holders who may not be meeting the requirements of their award category or complying with code principles.
It remains to be seen if the government’s attempts to improve payment practices in the UK will have the desired outcome and reduce the number of businesses going bust.
The post Improving payment practices in the construction industry with retention reporting requirements appeared first on Planning, Building & Construction Today.
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