The launch of a new fair payment charter that would see suppliers paid within 30 days could spell the end for project bank accounts, the government’s construction tsar has said.
ICE past president and government chief construction advisor Peter Hansford said that widespread adoption of the new charter would ultimately remove the need for project bank accounts (PBAs).
Hansford was speaking at an NCE breakfast briefing last week ahead of the launch of a new charter on 22 April. The charter, developed by the cross government and industry Construction Leadership Council (CLC), will demand that signatories adhere to 30 day payment terms by January 2018.
Hansford stressed the importance of getting tier one contractors to sign up.
“I think it is a really positive step,” he said. “Late payment is a key obstacle facing many in this sector. It’s not unusual for lower tier supply members to have to wait up to 100 days - often they have to rely on borrowing to pay for materials and labour. Figures show that only 5% of specialist contractors are paid within 30 days.”
Adoption would mean that PBAs have served their purpose, said Hansford. PBAs are ring-fenced bank accounts from which payments are made directly by a client to members of its supply chain. All suppliers are paid simul
aneously, normally within three to five days from the client paying the agreed value of the amount due to the main contractor into the account.
But many tier one contractors dislike PBAs as management of the multiple accounts in the system creates introduces a significant additional overhead to their businesses. Despite this concern, the government has said that PBAs will be used on public sector projects “unless there are compelling reasons not to do so”. It has committed that £4bn of construction projects will be delivered using them between 2012 and 2015.
“On time payment is the key principle here,” said Hansford, when asked about the future role for project bank accounts. “Perhaps to a degree it was taking a sledgehammer to crack a nut. I don’t regard them as being the panacea.”
Challenged on the time it would take to phase them out, Hansford said: “The charter is voluntary and will hopefully gain widespread sign-up. That will take over project bank accounts, but in the meantime we have both of them.”
The new Supply Chain Charter has been written by Institute of Credit Management chief executive Philip King and agreed by the CLC, Hansford said. It will operate on a voluntary sign-up basis. Those who sign up commit to making payments within 60 days effective immediately; within 45 days by June 2015; and within 30 days as of January 2018.
Hansford said making the change would not be easy.
“Any organisation that becomes a signatory to the charter will agree to apply the commitments, and compliance will be monitored through the reporting of KPIs [key performance indicators],” said Hansford. “The phased approach is there because it will require some businesses to change their business model, which will be hard,” he said.
Hansford insisted it was important that sign-up to the charter was driven by industry rather than government regulation.
“It’s far more powerful if it’s operated on a voluntary sign up basis - it shows that industry is coming together to solve a problem. It’s always a far more powerful thing if it’s something you do than something your client tells you to do,” he said.
Hansford was speaking on the importance of access to finance. Figures had shown, he said, that a quarter of contractors last year said they had lost their businesses or abandoned plans to grow because of an inability to access finance.
“It is clear that we as a sector have serious issues around access to capital,” he said.
To illustrate the extent of the problem facing the industry, Hansford cited figures that showed that bank lending to the construction sector decreased from £32.2bn in early 2009 to £19.9bn in December 2012. And advice on bank financing had been sought by only one in 10 construction SMEs compared to one in three of firms in all sectors.