In January this year, National Highways announced changes to the way that it uses Project Bank Accounts (PBAs), in a bid to protect smaller contractors from main contractor insolvencies.
Simply speaking, PBAs involve the client paying money into an account which then pays out to the main contractor and lower tier contractors at the same time – rather than all payments going through the main contractor. This means that subcontractors aren’t left waiting for months for payments and – theoretically – they won’t be left in the lurch if the main contractor goes bust.
National Highways was one of the trailblazers for PBAs and has used them for over a decade. The change it has just made means that tier 2 contractors will be automatically opted in, whereas previously they had to sign up themselves. Only 80% were doing so, with 20% thinking it was not worth it or too much hassle.
With financial experts predicting a hike in insolvencies in the sector this year, National Highways’ timing is not difficult to understand. Could it be that more public sector clients will follow the authority’s lead?
Professor Rudi Klein, formerly CEO of the Specialist Engineering Contractors Group and a long-time champion of prompt payments in construction, certainly hopes so. He is quoted in the National Highways press release that announced the changes as saying: “If you’re involved in a public sector contract and not using PBAs, what’s stopping you?”
Central Government departments in England are already supposed to use them, unless there’s a “compelling reason” not to and Governments in Scotland, Wales and Northern Ireland have mandated them for projects over certain sizes. But take-up hasn’t been as widespread as proponents hoped.
One thing that has stopped PBAs being more widely used is the reluctance of tier 1 contractors, who lose virtually all their cashflow through this method. National Highways says that payments are now made to tier 2 contractors within an average of 18 days. That’s quite a contrast with the bad old days when certain contractors used to sit on payments for three months and gain some interest.
There is still a huge difference between the worst and best payers in the industry, as information submitted under the Government’s ‘Duty to Report in Payment Practices and Performance’ shows. The fastest payer takes an average of 16 days to pay invoices, whereas at the other end of the spectrum, one company takes 63 days. The industry average for the top 43 main contractors is 32 days.
Another reason some aren’t keen on PBAs is that they take time and resource to set up – which is OK in an ongoing framework situation, but less attractive for single projects. Some local authorities create one PBA for several small contracts to save on administration time and cost.
Then there’s the issue of transparency. Speaking to Building magazine back in 2019, National Highways’ head of cost intelligence Lloyd Biddell explained how it gave the agency a much greater insight into costs and activity in the supply chain. Perhaps not every contractor would consider that a bonus.
There have been claims that PBAs don’t always work. When contractor Roadbridge collapsed while working on HS2 last year – which uses PBAs – Construction Enquirer reported that several supply chain contractors were left out of pocket, suggesting that only tier 1 contractors and a few of the tier 2 contractors were signed up to the PBAs. That could be one problem with National Highways’ move, since it only seems to include tier 2 contractors, not tier 3 ones.
Whatever the pros and cons of PBAs, what all lower-tier suppliers can agree on is that prompt payment is vital at a time when prices are rising and demand is slowing down. Any mechanism that can help with that should be welcomed with open arms.
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