Asking for the moon: Construction Act changes

Rudi Klein, chief executive of the Specialist Engineering Contractors’ Group, queries my concerns over the SECG’s proposed law requiring payers to provide adequate security for payment on request at any time (24 April, page 51). If the requested payer does not provide security, the payee is entitled to suspend the works after a seven-day notice period.

In January Lord O’Neill tabled the SECG’s proposal (as its president) as an amendment to the Construction Act change bill that is passing through parliament. He withdrew it, apparently because it too obviously favoured the SECG’s members, while still advancing, for a time, more neutral amendments. Lord Borrie took up the proposal, but did not put it to a vote in the House of Lords. We wait to see if the House of Commons votes on it.

The SECG has sought support for its proposal from a 1935 US statute (the Miller Act) that requires contractors to provide bonds to cover payments to subcontractors and sub-subcontractors, but only on government projects. Its scope is limited because US “lien laws” on property do not apply to the government. These laws allow subcontractors and those lower down the contractual chain, when they have not been paid, to register an interest in the asset that their work adds value to as a way of securing payment. The Miller Act does not supplement a payment and adjudication system like the Construction Act’s – as the US does not have one. The SECG is mixing and matching; as the UK lacks “lien laws” there is nothing to supplement.

There are other reasons for doubting the SECG’s proposal. First, it would be expensive for payers to obtain security. Unsurprisingly, banks charge for the service.

Second, banks and others who give security often require security of their own. This may entail payers in ringfencing working capital, making it harder for them to make payments, if not increasing their chances of insolvency.

Third, those subcontractors requesting security from contractors may in turn have to give security to their sub-subcontractors and the latter may have to provide it to their sub-sub-subs. This “all seems a bit self-defeating” as the government put it in a recent letter to peers.

Fourth, if a contractor, say, went insolvent having given its subcontractors security, there would be fewer assets available to satisfy creditors that were not construction firms. Those creditors might have requested security, but there would be no sanction if the contractor refused. Subcontractors would be in a stronger position in being able to demand security. While the Construction Act already gives preferential treatment to our industry, it is difficult for parliament to justify disadvantaging other industries.

The protection is impossible to factor in when the contract is negotiated, as it is potentially a cost to all payers

Fifth, it is hard to see why a payee should obtain something for nothing; something that was not even requested when its contract was concluded (let alone included in the contract) without even a late payment.

Of course the act and the bill already impose certain provisions as to payment and adjudication – but from a broader economic perspective, do we really want to add the cost of the SECG’s proposal onto construction costs in the UK? Someone must pay for it, and it adds nothing to the product’s value.

Rudi says that payees must continue to fund retentions and lengthy credit periods but this seems inconsistent with campaigning to eradicate them: if they go, will the SECG’s proposal fall away? As for payees having to fund performance bonds, their contract price may include it. The SECG’s proposal is impossible to factor in when the contract is negotiated as it is potentially a cost to all payers (that is, everyone other than those at the very bottom of the contractual chain).

Project bank accounts would seem to offer a better alternative to the SECG’s proposal, but progress is slow. Although they are included in the Strategic Forum’s Construction Commitments, they were dropped for Olympics projects and few public authorities have shown an appetite for them. This is where we need the government’s lead.

In any case, the political reality is that the government appears intent on enacting its changes to the act pretty much as they stand. It has so far rejected all the SECG’s suggested changes. As the SECG’s payment security proposal was not consulted on during the four years of consultation preceding the bill, it is hard to see how a proposal with such far-reaching implications could be enacted.

Overall, the most important issue is whether the government’s recent announcement that it intends another 18 months of consultation will delay the coming into force of the Construction Act changes – assuming, that is, that our next government does not bung them in the skip.