Fair payment is key to true supply chain collaboration, and a project bank account is the way achieve it

Antiquated and unfair payment practices are holding back businesses of all sizes and could cause untold damage to the building services sector in the present economic climate. Specialist contractors being denied fair payment on time for work completed has been a big contributor to poor delivery of projects.

The House of Commons business and enterprise committee seems to agree. It has called for the supply chain to be more involved early in the procurement process and for an end to payment retentions as well as, crucially, more extensive use of project bank accounts (PBAs), project insurance and collaborative contracts “to facilitate team working”.

A Commons briefing on the subject brought high-level support for attempts to reform payment across construction. “Poor payment practices erode goodwill and inflate tender prices. Payment certainty is the lifeblood of the construction supply chain,” Brian Kilgallon, of property and construction consultancy Rider Levett Bucknall, said during the briefing.

The PBA is a joint or trust account set up between clients and main contractors. It can save everyone a great deal of time and money by ensuring that all members of the supply chain receive their payments promptly and at the same time as the main contractor.

The contractor prepares a payment schedule, detailing certified sums due to each supplier and itself. Invoices are raised in the normal way, with the client matching the invoice with the certificate and releasing funds into the account. At this point, the client and the lead contractor issue the payment schedule to the bank. When the bank receives the dual authority from both parties, funds are released automatically to the supply chain.

Security of payment, particularly for small and medium-sized enterprises, is the main incentive behind this initiative. Many SMEs go out of business because a company they work for goes bankrupt. The PBA is structured so that all funds belong to both the main contractor and the subcontractors, providing insolvency protection in the event of the main contractor going bust.

All funds belong to the subcontractors as well as the main contractor, providing insolvency protection if it goes bust

Research by the Specialist Engineering Contractors’ Group suggests that members of the supply chain would be prepared to discount their prices by 2.5% in return for such payment surety. This would be recouped from the finance charges that could be left out of the subcontractor’s initial price because it knows it will be paid within 30 days, and the insolvency insurance, which would no longer be needed. Also, overheads to cover debt chasing and the cost of disputes would be cut over time.

Adopting PBAs would save public-sector clients an estimated £200m, growing to £750m as the overhead cuts are flushed out. This has prompted the Office of Government Commerce to recommend that all government procurers “aggressively specify [use of PBAs] where practicable and cost-effective”.

For every £1 paid in successful professional indemnity claims, £4 is paid to cover legal costs. Our industry can ill afford that level of waste. Defensive stances, bred by traditional divisive insurance policies, create a negative blame culture and such policies don’t give the client any real certainty – but do prevent supply chain collaboration.

Producing a sustainable built environment requires significant long-term investment in technology, skills and competence. Without fair payment in full and on time, SMEs will find it increasingly hard to make that investment.

Original print headline - Money talks