And project bank accounts can provide it, says Debbie Abrahams, MP
I have been campaigning against late payments since 2011 after a local haulier came to see me to tell me about the difficulties he was having getting paid promptly by one of the big supermarket chains. When I investigated, in my capacity as MP for Oldham East and Saddleworth, I was staggered to see how endemic late payment was, not just locally, but across the entire country.
Four out of five companies, across all sectors, experience late payments and are owed money, with 68% having to write off bad debt. One in three small businesses say late payments are forcing them to rely on bank overdrafts to keep up with overheads, with more than a quarter saying late payments are forcing them to pay their own suppliers late. Collectively, small businesses were owed £14bn in late payments last year.
Also read: Retentions bill set for further delay
In 2013, I held an all-party inquiry to look at the issues associated with late payments. Our key finding was that late payment reflects the culture within a company, which in turn ultimately reflects its leadership. It was clear late payment was used as a form of corporate bullying, with the large companies exerting their power over their smaller suppliers just because they could.
There is evidence many large companies are trying to rebuild their balance sheets on the backs of small firms […] I believe late payment like this is unethical and should be as unacceptable as tax evasion
There was also evidence many large companies were trying to rebuild their balance sheets on the backs of small firms – even having business models that rely on delaying payments to suppliers. I believe late payment like this is unethical and should be as unacceptable as tax evasion.
In December I followed up on my 2013 inquiry with a round table of representatives from small firms, including the Specialist Engineering Contractors’ Group and the Federation of Small Businesses. While some of my inquiry recommendations had been implemented, clearly there was still much to do – and the practical next step was project bank accounts (PBA).
Existing measures to tackle late payment have had limited effect and although the private sector tends to be worse for paying late than the public sector, some government departments are also failing to meet their commitment to pay 80% of undisputed invoices within five working days.
Last month, my ten-minute rule bill on using PBAs on public sector projects was heard in parliament – a year to the day that Carillion announced it was going into liquidation. After the construction giant’s collapse, thousands of firms in its supply chain were left reeling with debt. A survey of building, engineering and electrical firms by the Building Engineering Services Association and Electrical Contractors Association showed small businesses were, on average, owed £141,000 by Carillion out of a total of £2bn owed to suppliers. The vast majority of these suppliers received no recompense. It has been estimated that 780 small building firms went into insolvency in the first quarter of 2018 as a direct consequence of Carillion’s collapse.
In my speech I told fellow MPs about Neil Skinner, whose firm Johnson Brothers is based in my constituency and was a Carillion supplier that lost £176,000. Neil told me Carillion often went over 60 days before paying, even then with a lot of chasing; once a job was finished the payments just stopped and it resorted to tactics such as finding fault with an invoice, referring him to their overseas accounts department, querying statements and disputing invoices. Lastly, it imposed a 15% non-negotiable discount on completed work or threatened to send all unpaid invoices back to its QS department. Carillion went under owing Neil 15% of his annual turnover.
My bill would ensure all public sector projects over £500,000 use PBAs – not only protecting small firms from losing money owed to them should the tier-one supplier become insolvent as Carillion did, but also stopping them being paid late.
PBAs are ring-fenced bank accounts into which money due to firms providing construction or other works is paid. The accounts are ring-fenced within a trust arrangement so that if a tier-one contractor becomes insolvent the money for the subcontractors is protected. They do not disrupt contractual arrangements. But instead of public bodies paying tier-one contractors directly, the public body pays money directly into the PBA. The tier-one contractor and suppliers are then all paid simultaneously, usually within 15-18 days.
The government is already using PBAs in many areas. For example, Highways England use them for all its works; by 2020 £20bn worth of highways work will have been paid through PBAs. They have also been used in building projects in Scotland, Wales and Northern Ireland and some local authorities are using them.
Internationally, many Australian states mandate for PBAs to be used in construction projects, and last year the European Commission agreed to use PBAs for European projects.
As well as protecting and speeding up payments to small suppliers, PBAs help reduce disputes and disruption as suppliers are less likely to suspend their work when paid promptly. The costs of public sector projects are reduced too, as the greater security of payment provided by PBAs is factored into suppliers’ pricing.
Our small business sector is the power house of our economy, contributing almost £2tn of annual turnover and 52% of all private sector turnover. They are critical to boosting aggregate levels of productivity in the UK, which is at the lowest point in a decade. For a sustainable recovery and healthy growth, we need to support and nurture our entrepreneurs and small businesses. There’s so much that needs to be done to tackle late payments and protect small businesses; my bill is one step in this process.