THE Specialist Engineering Contractors (SEC) Group Scotland has called for a three-pronged approach to help protect SMEs in the construction sector in future following the collapse of Carillion.
The potential impact of the construction giant’s liquidation on subcontractors and members of the supply chain has brought the long-standing issue of payment security firmly into focus.
SEC Group Scotland national executive officer Alan Wilson told Project Scotland the organisation would like to see cash retention monies placed into protected trust funds; Project Bank Accounts used for all public sector projects over £2 million; and a disciplinary system whereby contractors who don’t pay their supply chain partners in time are barred from tendering for public sector works.
There is currently a Private Member’s Bill relating to cash retentions in construction being discussed in the UK Parliament, which has attracted cross-party support. If successful, it could see retention monies being ring-fenced in an account until such time as it is due for release.
While any potential new UK legislation wouldn’t automatically apply in Scotland, Alan believes the Scottish Government would find it nigh impossible not to follow suit. “I’ve worked in this sector for nearly 30 years and I think this is probably the best chance I’ve seen of us achieving something like this,” Alan explained. “On top of the Private Member’s Bill, we also have a consultation underway through the Department of Business, Energy and industrial Strategy in England. Again, although this would only be applicable to England, the momentum would be so great that it would be very difficult for any of the devolved nations to choose to ignore it.
“With the demand from industry, and with cross-border work and contracts, it would be very difficult and in my mind foolish if any of the devolved nations didn’t apply a similar requirement to retention. We’re optimistic on that issue.
“This is an opportunity for the Scottish Government to grab the nettle and really do something that will make a positive change for SMEs in Scotland.”
At present, Scottish Government bodies must include a Project Bank Account (PBA) for building contracts valued at over £4.1 million. SEC Group Scotland would like to see this limit amended to include all projects over £2 million. Alan said, “There has been a very successful series of projects going through PBAs but the limit is still quite high. In Northern Ireland and Wales, their level is £2 million. I think it would be appropriate to change the limit for PBAs to £2 million. From memory, when we did some analysis, there were only around 50 projects of £4 million+ value. We need to think about how other capital works of a lower value can offer some form of protection to the SMEs who quite often are the ones carrying the risk and do most of the work.”
Alan is also an advocate of a ‘red card/yellow card’ procedure, which punishes those firms that aren’t paying supply chain partners on time.
He explained, “If a main contractor is not paying their supply chain within 30 days, then the client should have the opportunity to apply a yellow card – a warning effectively – and then ultimately if things don’t improve, a red card which excludes them from tendering from public works for a period of time. There’s a stick approach to that, along with the carrot, where firms can continue to be able to bid if they pay their suppliers on time, which is what we should all be doing anyway.”
Alan believes “without doubt” that some of the fallout from Carillion’s demise could have been minimised if these measures had been put in place earlier.
He said, “If you look at retentions, we had an example of a contractor who told us that on an MoD job in Scotland, Carillion took a 10% retention from them of £50,000. In that job, the MoD hadn’t actually requested retention, so Carillion unilaterally imposed a retention regime to no intent and purposes other than for them to have the money.
“That money is undoubtedly now lost to the contractor. To a relatively small business, that will have ramifications, not just for this week or next week, but for years. That amount of money could wipe out a firm’s profits for a year or longer. It could impact perhaps on their recruitment and training of staff or recruiting another apprentice. “Whilst Carillion is very much a news story of today, these things happen on a regular basis. The SMEs often bare the brunt of that and it impacts on them for months and years afterwards, which can’t be good for the stability of our industry.
“We think that our suggested changes are sensible and straightforward and we would that these would have a major sea change in the way the construction sector operates.”
A Scottish Government spokesperson told Project Scotland it is in “close contact” with business organisations, including Construction Scotland and the Civil Engineering Contractor’s Association (CECA) to help businesses and employees deal with the impacts of the collapse of Carillion.
The spokesperson added, “Our regular engagement with Construction Scotland and the wider construction industry includes discussion on the implementation of the recommendations of the review of Scottish public sector procurement in construction and their impact on the industry.
“In addition, our Project Bank Account procedures enable prompt payments for participating smaller businesses and cash flow protection from an insolvent main contractor.”
Scottish Government Minister for Business, Innovation and Energy Paul Wheelhouse met with Alan Wilson and representatives of the SEC Group twice last year and recently responded to a letter from Mr Wilson thanking him for the offer to work with the Scottish Government around the potential for a “construction regulator” and future arrangements for management of retention payments.