Research shows project bank accounts making inroads into construction payment abuse

 

Three years ago the demise of Carillion highlighted the extent of payment abuse in the UK construction industry.  In an effort to counter this public sector construction procurers have been using project bank accounts to ensure that SMEs in construction supply chains receive their due payments.

Now research carried out by the Specialist Engineering Contractors’ (SEC) Group and Constructing Excellence has revealed that PBAs are gaining traction across the whole of UK construction.  With the publication of the Government’s Construction Playbook – which will be the best practice manual for public sector construction – both organisations believe that this amounts to a significant booster to improving supply chain performance and promoting building safety.

The attached appendix provides some key statistics on the use of PBAs across the UK.  The most prolific user is Highways England.  By using PBAs Highways England are able to ensure that sub-contractors are paid within 18 days; sub-contractors on highways works did not lose out when Carillion went into insolvency (because their monies were ring-fenced).  By 2025 over £17 billion of highways works will have been paid through PBAs.

Speaking on behalf of Highways England, Lloyd Biddell said that PBAs are the most effective method for secure and regular cash flow:

“Using them…..ultimately helps us to deliver our programme to improve our road network, and besides efficiencies, they’re also helping us to do the right thing for our suppliers.”

In 2012 East Riding of Yorkshire Council became the first local authority to use PBAs.  Speaking for the Council, Steve Baker said:

“Due to this success [of the first PBA] we now use PBAs for all projects over £5m and with the experience gained are reviewing lowering this to £2m.”

SEC Group’s CEO, Professor Rudi Klein, and Head of Constructing Excellence, Alison Nicholl, jointly issued a statement praising all those public sector clients either regularly using them or proposing to use them:

“We have come a long way since PBAs were first mooted almost 20 years ago as an effective method for curbing payment abuse.  Our research shows that PBAs have entered the mainstream as far as public sector construction is concerned; we now encourage private sector clients to follow suit.  A major benefit of PBAs is that they encourage collaborate working since the supply chain does not have the distraction about whether or not they will be paid”.

The PBA mechanism works as follows:

  • Construction Clients pays monies due to tiers 1 & 2 suppliers (and possibly tier 3) into a bank account ring-fenced within a trust arrangement (the monies are protected against tier 1 contractor insolvency).
  • All tiers of suppliers are paid simultaneously within days since payments do not have to cascade through different layers of contracting.

PBAs across the UK: Key stats 2020

England

UK Government policy since 2010: All government departments/agencies and non-departmental bodies MUST use PBAs unless there are “compelling reasons” not to do so.

  • Most prolific PBA user is Highways England: by 2025 £17bn worth of highways work will have been paid through PBAs.
  • Currently Environment Agency has 120 PBA projects.
  • Other government department users include Ministry of Justice and Defence Infrastructure Organisation.
  • HS2 and Network Rail are committed to using PBAs.
  • A number of local authorities are now using PBAs with the first being East Riding of Yorkshire.

Wales

Welsh Government (WG) policy similar to that of UK but commenced January 2018 with a project threshold of £2m or over.

  •  Slow initial implementation of the policy but now £873.8m of Welsh public spend will be paid using PBAs (mainly the NHS Capital Programme and 21st century school’s framework).
  • WG can enforce implementation across the whole of the public sector by stipulating the use of PBAs as a condition attached to any grant-aid).
  • Many Welsh local authorities are now using PBAs e.g. Port Talbot, Cardiff, Swansea, Vale of Glamorgan, Powys.

Scotland

Scottish Government (SG) mandated the use of PBAs for all SG bodies (those funded by SG) as from September 2016.  The project threshold for using PBAs was £4m for building works but subsequently this was reduced to £2m.

  • Since 2016 £700m of SG works has been paid through PBAs.
  • Some local authorities are now using PBAs with the City of Edinburgh Council leading the “pack” with 5 PBA projects.
  • Scotland’s Rural College (main campus is near Aberdeen) was the first higher education institution in Scotland to use PBAs.

 

Northern Ireland

Northern Ireland Executive mandated PBAs from January 2013 with £1m threshold, later raised to £2m.

  • In 2020 there have been 35 PBA projects with a total value of £579.3m.
  • The policy is not mandated for local authorities where the take-up has been slow.

Notes

  1. SEC Group is an umbrella body representing the largest sector in UK construction (by value). The specialist engineering sector comprises mainly SMEs.  SEC Group members are: British Constructional Steelwork Association, Building Engineering Services Association, ECA – Electrotechnical and engineering services trade body, Lift and Escalator Industry Association, SELECT (Electrical Contractors Association of Scotland), SNIPEF (Scottish and Northern Ireland Plumbing Employers’ Federation) and Scaffolding Association.
  2. SEC Group has been the industry’s lead campaigner in persuading public sector bodies to use PBAs.
  3. PBAs are now being used across Australia with Queensland legislating this year to mandate the use of PBAs across the whole of Queensland construction by July 2022. Last year Professor Klein drafted similar legislation as a Private Member’s Bill for Debbie Abrahams MP.
  4. In her report on building safety published in May 2018, Dame Judith Hackitt said:
    “Payment terms within contracts (for example, retentions) can drive poor behaviours, by putting financial strain into the supply chain…..non-payment can cause subcontractors to substitute materials purely on price rather than value for money or suitability for purpose.”
  5. Banks providing PBAs include Lloyds, NatWest Group and Danske Bank.
  6. For further information please contact Maria Balermpa, contact@secgroup.org.uk