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Scottish local authorities urged to protect supply chain retentions

The Specialist Engineering Contractors’ (SEC) Group Scotland is calling on construction procurers in local authorities to protect retention monies belonging to SMEs in their supply chains.

The Group is also asking Scottish councils to be more proactive in checking that supply chain firms are getting paid and barring poor payers from bidding for council works contracts.

This follows an extensive survey of Scottish local authorities which has highlighted the use of cash retentions in council works contracts.  The research, based on data gathered through the Freedom of Information Act, also revealed a lack of monitoring by councils of payment performance along the supply chain.

Key results from the survey are as follows:

  • All Scottish councils (almost 94 percent) deduct a five percent cash retention (some councils reduce this to three percent for larger value contracts but this is not necessarily reflected along the supply chain).
  • 32 percent of councils use cash retentions to bolster their working capital or fund other activities. 55 percent stated that cash retentions were held in a ring-fenced account.
  • The vast majority of councils (87 percent) either do not insist that main contractors release sub-contractor’s retention monies on time or they do not check that they are being released on time.
  • Given that sub-contractors’ retentions are unprotected (whereas main contractors’ retentions are protected because public bodies do not become insolvent) none of the councils had measures in place to ring-fence their monies. Most councils assumed that a requirement to have 30 day payments in sub-contracts would suffice.
  • Of major concern was that 74 percent of councils were failing to implement effective (albeit proportionate) measures to ensure that 30 day payments were made along the supply chain (section 15 in the Procurement Reform (Scotland) Act requires councils, when drawing up their procurement strategies, to put in place measures to ensure sub-contractors are paid within 30 days).
  • It was encouraging that both Clackmannanshire and Edinburgh City Councils were committed to using project bank accounts (PBAs) for major capital projects.  PBAs enable supply chain firms to be paid from the same ‘pot’ without waiting for payments to travel along the different contracting layers.

Business minister Jamie Hepburn MSP said: “The Scottish Government recognise the negative impact that poor supply chain payment practices have on the construction industry. We believe in fair and transparent working practices and a culture that supports prompt payment is essential to secure investment and jobs.

“Our Economic Action Plan sets out our intention to step up our engagement with the construction sector to support its plans to develop and grow a more sustainable, productive and innovative industry. Having listened to the construction industry’s concerns, a public consultation on the use of retentions in construction contracts will take place this year.

“In addition, the Scottish Government’s project bank account policy means more subcontractors will benefit from prompt and protected payments in Scottish Government contracts. We welcome SEC Group Scotland’s continuing support for project bank accounts and strongly encourage other public bodies to implement them into their construction projects.”

SEC Group Scotland national executive officer, Alan Wilson, said that the post-Carillion focus must be on effective measures to improve cashflow security for SMEs in Scotland. He added: “We recently witnessed the collapse of long-established building services company McGill & Co. with the loss of 374 jobs in the Dundee area. The administrators blamed this on payment disputes and delays. We cannot afford to continue to lose firms of this calibre. We have written to the Scottish Government to make them aware of this report and made a number of recommendations.”

Fiona Hodgson, chief executive of the Scottish & Northern Ireland Plumbing Employers’ Federation, stated: “Our member firms keep reminding us of the payment abuse they suffer, day in and day out. They believe that public bodies have a responsibility to ensure that all suppliers are paid on time and in the right amount.”

Among the recommendations that have been made by SEC Group Scotland is a request that the Scottish Government institute a campaign to urge all councils to use PBAs. Scottish Government has mandated the use of PBAs for project over £2 million. Furthermore, SEC Group has argued for legislation to require that all retention monies are held in a separate ring-fenced scheme.


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