SEC 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.
The call follows a 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.
SEC Group Scotland national executive officer Alan Wilson said that post-Carillion there must be a focus 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.”
Amongst 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 project bank accounts (PBAs). Scottish Government has mandated the use of PBAs for project over £2m. Furthermore, there should be legislation to require that all retention monies are held in a separate ring-fenced scheme.
Results from the survey include:
- all Scottish councils (almost 94%) deduct a 5% cash retention. Some councils reduce this to 3% for larger value contracts but this is not necessarily reflected along the supply chain;
- 32% of councils use cash retentions to bolster their working capital or fund other activities – SEC said that one invested them in the overnight money markets – with 55% stating that cash retentions were held in a ring-fenced account;
- Most councils (87%) either do not insist that main contractors release subcontractor’s retention monies on time or they do not check that they are being released on time.
None of the councils had measures in place to ring-fence their monies, said SEC. It stressed that main contractors’ retentions are protected because public bodies do not become insolvent but that subcontractors’ retentions are unprotected. Most councils assumed that a requirement to have 30-day payments in sub-contracts would suffice.
SEC added that it was of major concern that 74% of councils were failing to implement effective (albeit proportionate) measures to ensure that 30-day payments were made along the supply chain.
It said that it was encouraging that both Clackmannanshire and Edinburgh City councils were committed to using 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 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.”
Fiona Hodgson, CEO of the Scottish & Northern Ireland Plumbing Employers’ Federation said: “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.”
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