Project Bank accounts arguments for...

QS Week - 5th December 07

News reports are full of economic doom and gloom and if predictions are to be believed it will be a while before we experience any reversal in fortunes. Alongside recent influencing factors such as the US property crash and rising interest rates, long-term business issues remain that are stifling future economic growth. One of the most significant of these is late payment, a debt issue that has British industry in a chokehold. Indeed, a recent study conducted by Creditsafe calculates that a total of £128 billion is owed in late payments, an average of £29,000 per business.

As one of the UK's largest industries, there is a need for all of us working in construction to look for ways to combat the crippling effects of late payment and ensure that we are all able to continue reaping the benefits of construction's current boom phase. We are all familiar with the substantial additional financing and transaction costs associated with extended payment periods but what may not be public knowledge is that poor client payers often experience higher tender costs. Just as importantly, a lack of certainty over the value and timing of a payment erodes trust within the supply chain and acts as a barrier to true collaborative working.

There is no justification as to why late payment has become so endemic within the construction project process and moreover, no reason why this culture cannot be improved. Labour's 1998 Late Payment Act did not provide a complete solution to this issue and industry is now calling on big business to set an example of best practice in fair payment. Through the use of Project Bank Accounts the construction industry is being given an opportunity that it must embrace to set a benchmark for good payment practice and deliver a quantifiable improvement to current commercial debt statistics.

To date, industry has appeared wary of wholeheartedly embracing Project Bank Accounts but the results are tried, tested and critically acclaimed. My first experience of the benefits that PBAs can bring was on the Ministry of Defence's £41 million Andover North Site Redevelopment, where we were prime contractor. The proposed contract terms stated that the prime contractor would have to demonstrate payment of the supply chain before any milestone payment would be made to them. In response, we created and implemented a PBA, which achieved recognition from the National Audit Office for 'ensuring the timely payment of all parties and mitigating the risk of contractors unfairly withholding payments from their supply chain'.

Practically, the use of a PBA helped to reduce costs over the course of the project as suppliers did not need to build financing charges into their prices. More significantly, it also helped to reinforce the trust and co-operation between the supply chain, which thereby enabled true team working and collaboration. Based on these results, we have been working for some time with Barclays and Bank of Scotland to develop this one-off model into a fully realised and operational fair payment solution.

The recently released Office of Government Commerce's Guide to Best Fair Payment Practices sets out a strong case for the adoption of PBAs. Based on the public sector construction spend of £27.7 billion it is estimated that utilisation of fair payment practices and PBAs would save the public sector £200 million, rising to a staggering £750 million as the processes become more embedded and confidence in the system increases. Moreover, it is reported that public sector clients can expect to save up to 2.5 per cent in tender costs, specifically through the use of a PBA.

Surely the only question now is what is everyone waiting for? Once willingness is shown to get the ball rolling on better payment practices we will all begin to reap the benefits. Further long term cost efficiencies can be expected if the supply chain is able to reduce overheads relating to debt chasing and administration. We will all see improved productivity and fewer disputes, and the trust built up through certainty over how much and when a payment is being made will help to underpin greater collaborative working. We may have fallen short of Egan's original target of 50 per cent of all construction projects being undertaken in partnership by 2007 but PBA tools can help to foster a new era for the construction industry in which collaborative working will become the norm rather than the innovative.

PBAs are simple to use and operated and not the bureaucratic burden that some fear. More importantly, there's support available for anyone interested in unlocking the improved construction performance and value for money that PBAs can bring. Special familiarisation training courses guide clients and their project teams on the use of PBAs and how to secure the benefits they offer. Operationally, a PBA is similar to an Escrow Account. At the outset of a project an account is set up by a client and contractor on behalf of all parties receiving payment from it and is underpinned by a Trust Deed to ensure financial security. The contractors' responsibility to evaluate and approve supply chain interim applications is unaltered. Where the process is different with PBAs is that the contractor produces an analysis of all supply chain payments due. This information is issued to the bank electronically by client and contractor and the bank then processes all payments automatically by electronic transfer.

It might seem daunting now, but the long-term benefits of the use of PBA tools cannot be underestimated. We have an opportunity here to safeguard and foster long-term business success and place the construction industry at the forefront of UK innovation and it is up to all of us to embrace it.

Brian Kilgallon is a partner at Rider Levett Bucknall.