- 02 November 2016
- Corporate and M&A
It is a fact that small and medium-sized enterprises (SMEs) account for 60% of UK private sector employment and almost half of private sector turnover therefore it is evident that challenges relevant to SMEs are challenges to the UK economy as a whole. The biggest challenge SMEs face in the construction industry, undoubtedly, is cashflow. Increasingly, contractors are imposing lengthy payment terms on their sub-contractors and suppliers, forcing many SMEs to navigate the complex, often expensive finance options available to them. However, there might be a solution.
A project bank account (PBA) is a term used to describe a payment mechanism under which both contractor and subcontractors are paid at the same time. It increases payment security for those carrying out design and construction on construction projects. The employer maintains funds in the account to cover work in progress and other project commitments. Payments are made directly from the account to the supply chain. Sadly, this mechanism is largely used in the public sector rather than the private sector.
PBAs may also reduce administration, by preventing long chains of payments from the employer, to the contractor, to a sub-contractor and on to a sub-sub-contractor or supplier. The parties set up a project bank account in joint names, or in the name of the contractor. The building contract includes a mechanism for calculating the sum that the employer must pay into the project bank account, in time for payments to be made to the contractor, sub-contractors and suppliers before the final date for payment under their sub-contracts and supply contracts. The employer makes a payment into the project bank account, so that the contractor, sub-contractors and suppliers who are parties to the project bank account arrangements may be paid on time.
Once Minister for the Cabinet Office and Minister of State for Trade and Investment, Francis Maude, said:
“We are leading the way with this innovative approach to paying smaller suppliers, and where better to do so than in an industry where more than 99 per cent of businesses are SMEs. Project Bank Accounts means SMEs will be paid faster, freeing them of the burden of juggling with their cash and allowing them to focus on expanding their businesses instead of chasing payments.”
The advantages from the use of PBAs are ultimately financial and this is of particular note in the current climate. Advantages such as security and speed of payment, cash flow management as well as cost savings. PBAs, although, have set up costs and there is a risk of loss of control from the employer or the funder. In any case, if the parties are keen to follow best practice and support the cash-flow of the smaller organisations involved in the project, a project bank account’s advantages may outweigh its disadvantages. In an industry where it is not unusual for lower tier supply chain members to have to wait for up to 100 days to receive payment it would seem that PBAs are the way forward not only for SMEs but also for the UK economy in general.
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