The bill, introduced by Debbie Abrahams MP, aims to tackle the issue of poor payment practices which have blighted the UK construction industry for a number of years now.
This was dramatically apparent with the collapse of Carillion last year. Whilst Carillion went under, the 30,000 small businesses who together formed part of the construction giant's supply chain were left in a precarious position. Small businesses were owed an average of £141,000 by Carillion with a total figure of £2 billion owed to suppliers. With very few of these smaller businesses actually receiving the monies owed to them, it is estimated that over 780 firms became insolvent over the first quarter of 2018 directly as a result of the Carillion collapse.
So was the poor payment practice apparent after the Carillion collapse a one off? In fact, late payments are so common now that they have almost become the norm. It is of particular concern that UK small businesses were collectively owed £14 billion in late payments last year with around half of SMEs in the UK having to foot around £4.4 billion in admin costs to chase late payments. Ms Abrahams advised the Commons during the maiden reading of the Public Sector Supply Chains (Project Bank Accounts) Bill that small businesses are responsible for more than half of all private sector turnover and 60% of all private sector jobs: they are vital in the overall productivity of the industry.
Yet smaller businesses that are 'downstream' of an insolvent company will likely lose out on contract sums that are yet to be paid. A report released last year painted a bleak picture with over 40% of contractors suffering non-payment due to upstream insolvency over a 3 year period in the UK. It would seem the further down the supply chain and the smaller the business, the more likely you are to suffer cash flow problems.
The proposed solution, which has cross-party support, aims to ring-fence funds in a project bank account (PBA). This will ensure that the funds are protected with the intention being that they will be readily available for release when due. The current proposal seeks to make PBAs compulsory for all public sector projects over £500,000.
The idea is that accounts shall be ring-fenced in a trust arrangement so that if a tier 1 contractor becomes insolvent, the monies due to sub-contractors will be protected. As things stand, public bodies pay tier 1 contractors directly, with monies trickling down the supply chain. However, the proposal for mandatory PBAs will mean that public bodies will pay directly into the PBA with the tier 1 contractor and suppliers all being paid simultaneously thereafter.
There appears to be a general move towards the introduction of PBAs with Highways England and the Scottish Government regularly using this payment structure for construction projects. Just last year the European Commission agreed to use PBAs for European projects. This general move towards PBAs can be seen as a wider attempt to alleviate cash flow problems throughout the industry including the problematic use of retentions which was recently commented on by Martin Balfour and Lisa Dromgoole.