Examination of Witnesses (Questions 360-379)
NSCC, SECG
10 DECEMBER 2007
Q360 Mr Weir: Finally, the problem
of retentions has always been one within the industry. Has it
improved any since the Committee last looked at the issue five
years ago, and if not, why not?
Mr Wren: I am tempted to say no.
I would say not really. There have certainly been some improvements
but it is not the pace which we really need to see. I think it
just goes back again, without wishing to sound like a cracked
record, to the central issue of the key business drivers being
the parties involved, the issue of cashflow. What you have to
appreciate, I think, is as a specialist, my business has a high
capital cost, it invests in a lot of equipment, direct employees,
training, all of those sorts of issues, I am what I call a capital
user. It is absolutely fundamental to my business that my return
on that capital is adequate and that I am getting cash through
my business as well. Now the major contractors—and as Trevor
has said, there are some great ones out there, really good for
the industry, but a primary business driver is their cash that
they hold in the business. That cash is cash which is generated
on a project and should be going through the supply chain. The
longer you hold on to that cash, the more you can make from it.
Therefore, retentions is one element of that. If I make 3% profit
and I have 3% held in retention for two, three, four years, then
how do I invest? I cannot invest in equipment, I cannot invest
in training; and that is where the problem lies.
Q361 Mr Weir: Given that, is there
any difference about the way it is dealt with in the private sector
as opposed to the public sector?
Mr Hursthouse: I think there is,
yes. There are enlightened clients in the private sector who engage
with people in a way where they do not feel it necessary to take
retentions. There is an issue here which comes up time and again:
trust. Graham is talking about probably a more enlightened approach
to integrated project teams, to working closely with a full project
team. If you engage somebody and say, "Well, I would not
engage you unless you were reliable", why would you take
the retention? It is rather like saying to somebody, "I am
going to employ you but I actually think you are going to do a
lousy job so I will just hold your money back". If it will
help you in terms of the scale of the issue, perhaps examples
are quite good, in my own company, which is a business which does
£30 million a year turnover, the last retentions report had
shown a total held of just over £1 million, £525,000
worth of those were overdue. The oldest overdue was November 2005,
and over £110,000 of those were due in 2006. We are a business
which is very professional when it comes to collecting our money,
we employ a lot of resource in collecting our money. Even so that
is the position we find ourselves in.
Q362 Mr Weir: And how about the public
sector? Who are the worst in the public sector for holding onto
retentions?
Mr Wren: It is a bit patchy, but
generally, I think, the local authorities are still holding onto
quite a lot of retention. Interestingly enough, a lot of Government
departments now have a policy of no retention, but it is not enforced
with the contractors, so do you know what your contractors are
doing actually with the supply chain, in terms of retention down
the line? You will find that almost 100% of the contractors are
holding retentions on the supply chain that are doing work on
Government projects, and this is what goes between commitment
and enforcement.
Q363 Chairman: So the taxpayer is
funding the profits of the contractors?
Mr Wren: I would have to think
about that one.
Mr Hursthouse: Well, insofar as
the taxpayer is a client, I suppose—
Q364 Chairman: The taxpayer is paying
the contractors' fees and they are not passing them on down the
supply chain, so the taxpayer is creating a huge cash balance
for the contractors.
Mr Hursthouse: Yes, but ultimately
it gets passed on. It is just that it is often withheld for long
periods of time.
Mr Weir: Given your earlier answers and
the suggestion that the taxpayer is in effect keeping the main
contractor going, in the same way as a private client would be
paying him the money he was holding onto to pay his wages, and
to stop borrowing more money, so in effect it is an interest-free
loan from central Government, if that is what is happening.
Mr Wren: Effectively.
Mr Hursthouse: If you hang on
to somebody else's money, you are, I suppose, getting an interest
free loan, yes.
Mr Wren: An inspection of contractors'
balance sheets will show you the difference between the profit
and the cash. You will see that there is quite a big imbalance
on most of the balance sheets.
Q365 Chairman: The public policy
issue is retention is doing harm, you say, to the construction
sector, so the Government can say, "Tick the box, no retentions,
we are meeting all our objectives." In fact, in practice,
it does not make any damn difference at all, because the sub-contractors
are not getting paid.
Mr Hursthouse: I do not think
we could say that was universally true, but that is something
which happens, that is for sure, yes.
Mr Wren: That is generally true.
Mr Hursthouse: At Government level,
with local authorities, they do hold retention and they openly
tell you how they make money with it and use it for other purposes.
I think in the report you had from either of us, that is defined,
I mean, it is a piece of policy.
Chairman: Thank you. Thank you very much,
I am very grateful. Lindsay Hoyle?
Q366 Mr Hoyle: Can I just follow
on from that a little, because I am a little bit concerned. As
contractors, why do you enter into a contract when there is a
retention there? Surely it is down to yourselves. You are masters
of your own destiny.
Mr Wren: I sometimes ask that
question myself.
Mr Hursthouse: It is a very good
question. Well, you do not! I mean, of course, all of this seems
sometimes bizarre. It is a very good question, Mr Hoyle. Why does
not the specialist contractor turn around to the main contractor,
whoever it is, and say, "I am not having your contract, clear
off"? I take your point, but it is not quite like that. The
relationship in the industry is not quite like that. What actually
happens, you have a specialist, who is the guy who is doing the
work, he has a number of employees, whether it is 50 or 100, and
he needs a workload to keep his business going. Now from time
to time, and it is interesting how we were talking about the inconsistency
of contract types, people come to you, there is a dialogue to
secure work, and basically what you are left with very often is,
"Well, here is the work, it is yours because you are the
cheapest, but anyway, it is yours, and here is the contract".
This is where the power game plays, if you want, of, "Well,
if you do not have the retentions, you are not getting the job
then". "Hang on a second, I have 50 blokes here, what
am I going to do with them?" So there is an element of taking
on contractual conditions which either have to be tolerated because
it is custom and practice, or you assess the risk, that is not
likely to happen anyway. So it is a rather unusual relationship,
and whether I have described that sufficiently, I do not know,
but the reality is the work flow in a business has to continue.
Q367 Mr Hoyle: Presumably you build
in for it as well.
Mr Hursthouse: There is an extent
to which you do.
Q368 Mr Hoyle: So it is not quite
too many—
Mr Hursthouse: No. But then the
cost goes up and the client pays for it.
Q369 Mr Hoyle: That is the reality,
is it not? You are not really losing out, everybody is passing
it on. Just out of interest, as a specialist contractor, you will
also have more specialist contractors supplying you.
Mr Hursthouse: Yes.
Q370 Mr Hoyle: Do you hold back from
them?
Mr Hursthouse: That is an interesting
question as well, is it not?
Q371 Mr Hoyle: I just wondered—
Mr Hursthouse: I can answer it
quite honestly. If there is no retention on us, we do not.
Q372 Mr Hoyle: But if there is—
Mr Hursthouse: We do, except we
actually in our business have some thresholds, where we say: if
this piece of work that has been carried out is below a certain
level, we do not take retention.
Q373 Mr Hoyle: So the food chain,
yes.
Mr Wren: Could I just correct
one thing? I think you will find in our SME sector, we are not
talking about 50 employees, you might be talking about less than
five employees. The continuation of work with their clients, ie
contractors, is an extremely important issue for them, and therefore,
they are willing to let retention flow through on the basis of
getting continued work. Whether they should be doing it or not,
the realities of the situation are that they need to trade in
order to survive.
Q374 Mr Hoyle: Okay, I think we have
made our own points, thanks for that. Can I just move you on to
the review of the Construction Act? Why does the Construction
Act in its current form fail to meet the needs of many parts of
the industry?
Mr Hursthouse: I think on two
particular points. The two most important points are probably
the subject of payment and then of adjudication. In the case of
payment, the objective or requirement, probably the objective,
I think, was to provide an adequate mechanism to give people certainty
in terms of the amount of payment, and when they would receive
payment. In other words, there is an agreement to pay this on
this date, and we were talking earlier about these cashflow issues,
so there was a requirement to achieve that, and there are reasons
why that has not been achieved, which we can perhaps go into.
In the case of adjudication, there is a scheme which is part of
the original legislation, and the intention was that it should
be straightforward, simple, a quick, low cost way of immediately
resolving a dispute, usually to keep the flow of cash going, and
for all sorts of reasons that has been frustrated, manipulated,
interfered with, whatever you want to call it, when, to be blunt,
the lawyers got their hands on it, no disrespect to any lawyers
in the room.
Q375 Mr Hoyle: We always like to
blame those. In the case of the SEC Group—I suppose that
is the best way to call it?
Mr Hursthouse: Yes, that is fine.
Q376 Mr Hoyle: —they state
in their memorandums that the current consultation on the amendments
to the Construction Act bears little resemblance to the original
review of the area conducted by Sir Michael Latham in 2004. You
have touched on it, but could you outline your actual main concerns
on BERR's or DTI's proposed amendments to the Construction Act?
Mr Hursthouse: As far as we are
concerned we must achieve that objective; that is, certainty in
terms of times and quantum. The discussions with BERR are ongoing
and they are very open. I personally believe that they can be
productive and successful. I do not think at the moment there
is certainty that we have achieved that objective, but I believe
that we can; and, if I am honest with you I believe we will. I
believe there is a will to achieve that requirement. The fact
is that if you look at the thing originally there has been an
understandable desire to achieve consensus of opinion as to how
these things should be resolved. I do not understand the technicalities
but there was a regulatory reform order or whatever, and that
needed consensus to make it work. The reality is, as I hope we
have been explaining, that the parties are in different places
in this issue, and there will not be consensus. It is just unlikely
that there can be because we have different objectives.
Q377 Mr Hoyle: The Construction Act:
four years ago it started: who do you blame for it taking so long
to complete?
Mr Wren: I am not sure we are
into blame.
Q378 Mr Hoyle: Who do you hold responsible,
then? Is that better? We will dress it up!
Mr Wren: I am not going to get
drawn into blame.
Q379 Mr Hoyle: Who do you hold responsible?
Mr Wren: The central issue is
that, as Trevor described, we need to get consensus in an industry
where we have already, many, many times—
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