Exclusive: Project bank accounts are “unsuitable” for use on projects worth less than £50m and increase the cost of delivering schemes, an internal review by Willmott Dixon has found.
Analysis of a trial PBA the contractor used on a £3.6m school project for Warwickshire County Council, shared exclusively with Construction News, found its use increased administrative requirements and costs for tier one and two contractors.
Willmott Dixon deputy chief financial officer Graham Dundas said PBAs were unsuitable for lower-value projects with small supply chain partners which do not have qualified personnel and systems to deal with complex accounting and tax requirements.
“The challenges are in the resources available to small businesses that may only sit with their accountants once a year,” he said. “It’s a challenge to make them understand [the requirements] and make sure they get it right.”
PBAs are ringfenced electronic bank accounts, from which a client or main contractor makes payments directly and simultaneously to its supply chain.
The Construction Leadership Council’s supply chain payment charter in April included an objective to use PBAs on all central government contracts, and other contracts where appropriate, “unless there is a compelling reason not to do so”.
Mr Dundas said he was concerned PBAs would be mandated on all central government contracts and public sector frameworks, where they could be used on small schemes.
He said PBAs were more suited to projects worth £50m or more because “typically subcontractors are larger businesses with the right number of qualified staff” and that economies of scale could be achieved to reduce the administrative costs.
In 2013, 98 per cent of publicly funded construction projects were worth less than £50m and 78 per cent were worth less than £5m, according to data from construction intelligence unit Glenigan.
Willmott Dixon said the trial PBA on its Arley School project created additional administrative costs of £35,000, equivalent to almost 1 per cent of the total value of the project.
PBAs in numbers
£35,000 additional administrative costs incurred by Willmott Dixon on £3.6m Arley School project
£60,000 estimated one-off cost for Willmott Dixon to deliver staff training and changes to systems
£100,000 estimated cost for Willmott Dixon to make changes to financial systems to operate multiple PBAs simultaneously
£4bn of central government spending put through PBAs since 2009
2.5% estimated construction cost savings that can be made through using PBAs, according to the Cabinet Office.
“In a low-margin industry, when combined with the opportunity costs associated with PBA terms – a loss of nine days’ cashflow – this will increase the cost and therefore the price of delivering projects,” Mr Dundas said.
Skanska UK chief financial officer Roger Bayliss said the contractor was not in favour of PBAs.
“We can [administer PBAs], but there is a cost and that goes into the cost of the project,” he said. “So the questions we have to ask are: is it properly recognised, is it wanted and is there benefit to the whole supply chain in doing so?”
Skanska has committed to signing the CLC’s new charter, but Mr Bayliss said “a compelling reason [not to use PBAs] is that the supply chain mechanism is working perfectly well on its own”.
At present, construction procurers in central government, their agencies and non-departmental public bodies are required to provide for PBAs or contractually oblige payment to tier three of the supply chain within 30 days.
Construction News understands the government will resist complaints from main contractors and continue with the widespread use of PBAs.
One source said the government would not “stand by and allow commercial practice to adversely affect its supply chains…to the detriment of SMEs”.
Specialist Engineering Contractors’ Group chief executive Rudi Klein said PBAs reduced construction costs associated with financing lengthy payments, chasing payments and resolving disputes.
“There is nothing more bureaucratic and costly than to have a hierarchy of payment systems flowing through tiers of contractors with the risk that cash is not passed on because of spurious excuses or upstream insolvencies.”
He said main contractors would be able to recoup the initial outlay costs “because they will benefit from a reduction in their supply chain’s costs and by engendering a more collaborative delivery process through having a PBA”.
A Cabinet Office spokesman said: “We know that timely cashflow is crucial to the survival of many contractors in the supply chain, particularly SMEs and micro businesses.
“Those clients and contractors that are now regularly using PBAs see the benefit brought by greater confidence of effective cashflow.”