Nothing’s ever moved quickly in the world of construction, but recently you get the feeling that with payment practices, we are on the cusp of change and PBAs (Project Bank Accounts) are leading the charge.
What is a project bank account(PBA)?
These are ring-fenced bank accounts that allow for payments to be made directly and simultaneously to a main contractor and members of the supply chain.
This means that main contractors only control what payment is made, not when that payment is made. In essence, it is a cash-flow disbursement model designed to protect the project from the risk of supply chain insolvency and to speed up payment times.
Highways England, who have spearheaded the use of PBAs in the UK, aim to pay all suppliers down to tier three level within 21 days of the assessment date. Highways England have also committed £20 billion worth of work to go through PBAs by 2020.
These payment timeframes feel light years away from where we are now, with so many businesses still failing to adhere o simply paying their Tier 1 subcontractor within 60 days, let alone the rest of the supply chain.
So this seems like a no-brainer, right?
In theory yes, but why is it then that it’s taken 25 years from PBAs being initially recommended in Sir Michael Latham’s report back in 1994, just to get to this point?
As with every legacy practice in construction, it’s rooted in the culture of ‘we’ve always done it this way’ – change has never come easy to construction.
That, and the fact that the management of cash has been a key part of a main contractors’ business model. Few will be happy to admit it, but one of the ways a construction business can tolerate the high level of risk along with such low margins is by making interest on the substantial turnover that passes through their books
A PBA means that a main contractor will only be paid for their share of the work, not the full amount.
As a result, far less cash passes through a main contractor. A main contractor typically operates 30-90 day payment terms, giving them access to a large amount of ‘working capital’ before they pay their suppliers.
Cash is the lifeblood of the construction industry and this working capital is a ‘safety net’ that allows main contractors to take on such high-risk and high-value projects. If one project goes badly, it can spell the end for their business, so access to working capital is critical to their survival.
This means that PBAs have a direct impact on how a main contractor runs their business, wiping out between 30-90 days’ worth of working capital.
There’s also the issue of control. More so than in many other businesses, money is the motivator in construction. Just as with retentions, money is often held back to ensure work is completed both on time and within spec.
Whilst main contractors have a bad reputation for paying on time and employing tactics to delay payment, in many cases a delay or dispute over payment is entirely justified. Project Bank Accounts directly impact this control.
Essentially, for a main contractor to get behind the use of a PBA, in business model terms, it’s akin to a turkey voting for Christmas.
Change is in the air
There are three key things that are about to force a step-change for payment in construction.
Firstly, the Public Sector Supply Chains (Project Bank Accounts) Bill has been introduced and is currently progressing through the legal process. Created by Debbie Abrahams MP, a long-standing parliamentary campaigner for fair payment.
In direct response to the Carillion debacle, this Bill mandates the use of PBAs in the public sector for all tier one contracts over £500,000. With the devastating ripple effect on the supply chain when a main contractor goes bust, a PBA ensures insolvency protection for contractors in the supply chain.
Secondly, Oliver Dowden, the Cabinet Office’s minister for implementation, recently wrote to the Government’s largest suppliers reminding them of their target to pay subcontractors within 30 days or risk exclusion from public sector work.
Additionally, the Chartered Institute of Credit Management, strengthened by the appointment of the Small Business Commissioner, Paul Uppal to its board, announced suspensions and exclusions for businesses from its Prompt Payment Code where they failed to pay invoices in the agreed times.
Thirdly, Project Bank Accounts are now at the forefront of efforts to speed up the payment process for construction SMEs. With the Scottish Government the latest body to adopt their use.
This makes PBAs a requirement for government building schemes worth more than £2 million and for civil engineering projects exceeding £10 million.
The Celtic brethren have also followed suit. Northern Ireland introduced the use of PBAs in January 2013 on all construction projects above £1 million.
From 1 January 2018, the Welsh Government have stipulated that project bank accounts will be used, unless there is a compelling reason not to do so, on all conventionally-funded contracts fully or part-funded by the Welsh Government with a value of £2m or more.
As Max Jones, relationship director for construction and infrastructure at Lloyds Bank Commercial Banking, recently told Construction News: ‘We’re now starting to see some clients take action. Those working on large infrastructure projects, for example those managed by Highways England, increasingly see inserting project bank accounts (PBAs) into contracts as a way of addressing the issue and demonstrating their commitment to fostering better payment practices’.
Until the Public Sector Supply Chains Bill is passed, the UK government are yet to mandate the use of PBAs. However, for all projects over £5 million, contractors will need to demonstrate that they pay suppliers within 30 days.
Rob Driscoll, Director of Legal and Business at the ECA and Business Adviser to Cabinet Office – as well as long term industry champion of digitising payment in Construction to improve visibility, eliminate waste and improve productivity – has been encouraged by the progress we’ve seen lately: ‘
“Northern Ireland, Wales and Scotland have mandated PBAs, but the UK is a little more open, mandating PBAs unless there is a ‘good reason’ why not. However the Government are to start publishing the ‘reasons’ soon so that we shine the spotlight of transparency to ascertain the legitimacy of the rationale for not using PBAs.
“The biggest mandate for improving commercial behaviour regarding payment are two fold: a) The establishment of the Small Business Commissioner to champion the cause and b) the integration of mandatory payment reporting with the Dowden announcement linking future procurement opportunities to ‘good’ payment performance.
“In other words ‘nudge’ behaviour, to change commercial behaviour you have to modify their ability to commercially survive and link historic data to future opportunity.’”
Longer-term thinking – collaboration and commercial benefits
This is a significant step forward in an industry that still accounts for 31% of all late payments in the UK and where SMEs are owed an estimated £30 billion.
Lengthy payment periods mean many of the UK’s 280,000 construction businesses are having to focus on dealing with unnecessary interest charges and cash flow issues, rather than using funds for investment and growth.
Through the ‘certainty of payment’ offered through project bank accounts, subcontractors are able to think more long term.
It’s not just the certainty of payment that facilitates better collaboration and healthy working relationships, Highways England also report a saving of 1% through lower costs from the supply chain, as certainty of payment negates the need for a contractor to load a ‘risk cost’ into their prices.
Is a PBA the single ‘silver bullet’ to solve payment issues in construction?
In Australia, they are making moves to tackle both PBAs and retentions, led by the Queensland Government.
On 1st March 2018, the regime of Project Bank Accounts (PBAs) for Queensland government building projects valued between $1 million and $10 million commenced.
As stated in the Building Industry Fairness (Security of Payment) Act 2017 (BIF Act), PBAs are intended to “ensure that money paid to particular subcontractors is held in a way that protects the interests of subcontractors.”
The BIF Act provides for the implementation of PBAs in two stages. The first stage is currently in progress, mandating PBAs on Government-funded building and construction projects.
To date, 100 PBAs have been established and 17 have been completed.
There are three very interesting points of note in Queensland’s approach to PBAs:
– As mentioned in the BIF Act, a second stage to PBA implementation is due this year. This second stage will mandate PBAs on all private sector contracts worth over $1 million. This is a huge step to create a mandate in the private sector. This second stage was intended to go live this year, but has been delayed.
– A third stage if this PBA implementation is to look at applying PBAs further down the supply chain beyond tier 1 sub contractors.
– Unlike the UK, this is a very direct mandate and it’s clear Queensland see PBAs as the single way forward.
Does this work for the whole supply chain?
Highways England has a target for the funds to be placed in the PBA within 14 calendar days of the assessment date, with subsequent payments to all other levels of the supply chain to be made within seven days.
Thus, all suppliers down to tier three level who have signed up to the PBA would be paid within 21 calendar days of the assessment date.
However according to this report there’s a “degree of reluctance” among tier one contractors to sign up tier three subcontractors – “mostly due to a lack of direct contractual relationship between the two parties”.
Highways England say progress is being made, although “further work is required to ensure such payments become the norm and not the exception” – suggesting the PBAs haven’t quite taken hold down to tier three level as far as hoped.
A critical part of this is missing however. Whilst the PBA addresses the control of the money, it does not address the fundamental issues endemic in the payment process.
Note from the above statement from Highways England: ‘14 days from the assessment date’. Getting to the point of a certified assessment (Payment Notice) is where the majority of the issues lay.
Real-time collaboration
As any contractor will know, the application for payment process can be slow and disjointed, with paperwork, emails and spreadsheets flying around between various parties. Differences of opinion often arise over the assessment of applications or mathematical errors that may have crept into the process.
In Australia, the BIF Act mandates 3 different accounts per project – main a/c, retention a/c and disputed amts a/c. This has been shown to cause additional overhead.
So a PBA alone, as a cash-flow disbursement model, may not be enough. Collaboration is the key to overcoming these challenges, by facilitating the sharing and exchange of data both within and between organisations. Using a digital process to underpin the PBA, at the application for payment stage, means that data, documents and information can be shared in real time so all parties have a single view on the status of every contract.
This means that everyone is on the same page and knows exactly where they stand, which is crucial for making visibility possible across the supply chain. This level of cooperation will unlock the power of Project Bank Accounts and go a long way to getting all contractors paid within days and not months.
Takeaways:
– Project Bank Account payments go directly and simultaneously to a lead contractor and members of the supply chain.
– Funds are ring-fenced, so suppliers are not exposed to insolvency risks higher up the supply chain.
– Lead contractors using PBAs shouldn’t become mired in bureaucracy and disputes, or fall foul of fair payment regulations.
– All beneficiaries of Project Bank Accounts must ditch paper-based processes to make a PBA benefit the whole supply chain
– A digital-led collaborative approach at the payment application stage will smooth the PBA process later on.
