Impact of retentions
What is the impact on industry of retentions?
- Deprivation of working capital leaves businesses unable to grow (bid for new work), invest (engineering R&D and investment in digital transformation), recruit (new workers and apprentices), pay tax bills, and therefore precludes productivity improvement.
- As retention monies are not protected, ring-fenced or held in trust, if a contractor goes bust, the money is lost by subcontractors, and goes to other creditors, often outside the industry.
- In the UK, recent government research shows £700m of retentions were lost from upstream insolvency over a three-year period (prior to the collapse of Carllion). For each working day, the industry loses almost £1m, £4.5m a week or £20m a month.
- Research has found that SMEs spend on average 130 hours per year chasing late payment from larger firms. 34% of SMEs borrow to cover cash flow issues caused by cash retentions.
- Often this is written off as bad debt, due to the resource implications of chasing monies due.
- Cash flow issues leave businesses unable to: bid for new work, take on new workers and apprentices, pay tax bills, and improve productivity.
- The knock-on effects of cash retentions can also include stress and mental health issues.
- The current system is also a causal factor in bringing about a less efficient public procurement system and results in lower tax receipts for the public purse.