New legislation compels construction firms to report retention practices to enhance payment transparency.
- The statutory instrument aims to improve payment behaviours across the construction industry.
- Large firms are required to document retention clauses and standard rates.
- The new rules follow consultations and are backed by industry stakeholders.
- Additional measures are anticipated to further tackle late payment issues.
The construction sector is set to undergo significant regulatory changes as new legislation mandates large firms to document and report their retention practices. This legislation, introduced by a statutory instrument, seeks to increase transparency and encourage better payment practices. The changes will apply to accounts for financial years commencing from 1 January 2025, as announced by Business Secretary Jonathan Reynolds in a recent written statement.
This critical reform requires firms to disclose whether retention clauses are standard across contracts, identifying their normal retention rates and the methodology for releasing retentions. There is also a requirement to reveal the percentage of money withheld as retentions from suppliers, as well as the amounts retained from them. Companies that fail to comply with the new reporting standards may face governmental sanctions. The Department for Business and Trade has stated its intent to promote compliance prior to considering prosecution, reflecting a commitment to fostering a culture of transparency and accountability.
The initiative, originally proposed nearly a year ago by a previous administration, was praised by Rob Driscoll, director of legal & business at the Electrical Contractors’ Association. Driscoll noted it as a ‘milestone first step’ that shows the government’s dedication to fairness and growth, as well as a resolve to progress where predecessors hesitated. The legislative change was motivated by a government consultation where two-thirds of participants supported broader regulation of retentions.
The Department for Business and Trade clarified that this open reporting is intended to enhance compliance and payment behaviours by leveraging public pressure and setting good examples within the industry. The legislative changes were developed in consultation with key industry stakeholders, including the Construction Leadership Council, aiming to balance the need for informative disclosure with the practicalities of utilising existing data systems.
Furthermore, Jonathan Reynolds confirmed plans to introduce a new Fair Payment Code, as part of wider efforts to address late payment issues. This new code is expected to be supplemented by a public consultation aimed at exploring further legislative tools to mitigate late payments and extended payment terms. Reynolds emphasised that these measures are aligned with governmental objectives to eradicate late payments and enhance overall productivity, cash flow, and economic growth.
Rob Driscoll highlighted past voluntary measures’ failures, citing divided opinions on actionable solutions. The current government appears unwilling to accept such delays, intent on building robust payment reporting requirements that now encompass both value and volume, thus closing significant loopholes in previous reporting regimes. While some experts, such as barrister Rudi Klein, have welcomed the law, they urge further action, like the statutory ringfencing of retentions, arguing against perceived delays in thorough elimination of retentions by 2025.
The introduction of this legislation marks a pivotal moment towards achieving transparency and fairness in the construction industry’s financial dealings.
