Labour MP’s amendement would have applied to work valued at more than £2m
The government has rejected a proposed amendment to its Procurement Bill, which would have mandated project bank accounts on all jobs valued over £2m.
Labour MP Debbie Abrahams put forward the proposal in the House of Commons on Tuesday, 13 June, explaining that the measure would protect subcontractors’ payments and help prevent insolvencies, which are on the rise in the sector.
She gave the example of a joinery business in her Oldham East and Saddleworth constituency which lost £176,000 when Carillion collapsed in 2018.
According to accountancy firm Mazars, more than 4,100 construction firms went insolvent in the year to the end of January 2023, a rise of 49% on the previous year.
Abrahams said: “The majority of the insolvencies are the result of unprecedented cost pressures on small businesses: hikes in the cost of energy, materials inflation and increased labour costs.
“But fundamentally, the ability of firms to cope with those costs continues to be severely hampered by poor cash flow, which is often the result of poor payment practices, lengthy payment terms, myriad excuses for paying less than the amount invoiced or applied for, and a non-release or late release of retentions money.”
Under Abrahams’ proposal, companies would have been paid from a PBA within 12 days. Disputed money would remain in the account until a resolution.
She said protection retention money in this way would also protect public funds from tier 1 contractor insolvencies, as funds are held in ringfenced accounts instead of in the bank accounts of the main contractor.
The government rejected the amendment, arguing that PBAs were already encouraged through main spending departments and that it was not always cost-effective to use them on small contracts.
Cabinet Office minister Alex Burghart welcomed Abrahams’ “ongoing efforts […] to improve the liquidity for small businesses” and agreed that project bank accounts were often an effective way to protect suppliers.
“Government Departments have made a commitment to use PBAs in construction projects unless there are compelling reasons not to do so,” he said.
“However, it is not the Government’s position that PBAs should be mandated across all contracting authorities, as they are not always suitable or cost-effective, particularly where the subcontractor is very small or is paid more frequently than monthly, or where the supply chain is short.
“Instead, we intend to continue educating contracting authorities, through guidance, on the circumstances in which we believe PBAs are practical and effective.”
In Scotland, PBAs have been used since 2019 on all public sector building projects worth more than £2m, as well as all public sector civil engineering projects worth more than £5m.