Since the recession, U.K. subcontractors and suppliers have found themselves increasingly squeezed to pay bills while waiting for prime contractors to release project funds.
But now "project bank accounts," which the government introduced three years ago to speed and secure payments down the supply chain, are spreading as one of several initiatives to improve liquidity among smaller firms on public-sector projects.
By the end of March, the government expects to have awarded $6.6-billion worth of contracts covered by the payment approach. By cutting subs' wait time for payments to days from months, officials say the accounts will reduce project costs by about 1%.
Known as PBAs, the accounts are set to be the default option on all government work. Early adopters include the UK Highways Agency, with more than $25 billion of planned project investment by 2021. London's vast Crossrail underground rail network also is a pioneer, with PBAs in use on about $7 billion worth of contracts.
PBAs are essentially electronic bank accounts set up by main contractors and monitored by project owners. The accounts are funded by owners through their monthly payments to main contractors, with agreed-upon deadlines for paying firms further down the chain.
The Highways Agency's goal is to have all project supply-chain members paid within three to five days—instead of the standard 50 to 60 days—after funds are deposited into the accounts, says Mike Bennett, head of commercial management. "Because we have direct access, we can make sure [contractors] do what they said they would do," he adds. The agency has about 20 contracts under PBAs.
While the bank accounts appear to offer cost savings by easing supply-chain cash flow, Bennett regards security of payment to be at least as important. Since funds in the accounts are legally held in trust for the supply-chain members, they cannot be used for any other purpose, he explains.
Should a main contractor go bust, neither the bank holding the PBA nor other creditors can touch the funds.
With the PBA arrangement, "there is no incentive for contractors to keep the money in the bank," adds David Morrice, Crossrail's head of contracts.
This ringfencing of funds was a key reason the government in Northern Ireland adopted PBAs, says Alfie Watterton, regional executive secretary of the Specialist Engineering Contractors Group, an umbrella network of U.K. subcontractor groups.