IT’S time to end the scourge of late payment, says Grahame Barn
Each year, public bodies in Scotland spend more than £2 billion on construction, a huge chunk of their £9bn budget. Much of this goes to large multinational contracting companies as part of publicly-financed agreements. In turn, these main contractors use a supply chain of small and medium-sized construction subcontractors to deliver the project.
Currently, subcontractors, many of which are small, local businesses, are subject solely to the changeable terms of the main contractor. Small and medium-sized enterprises (SME) building firms, for example, which have to buy materials and pay employees, are often subject to long waiting times before being paid.
When small businesses have to wait for – and chase up – overdue payments, they can’t finance future projects, take on new employees, train apprentices and market themselves to potential customers. It can even push them into bankruptcy.
The Scottish Government recently announced a trial of project bank accounts (PBAs) as way of ensuring these subcontractors are paid on time. Instead of waiting up to 120 days, or more, for payments, PBAs speed up the process.
At a time of economic uncertainty, removing payment delays gives small businesses back control of their budget. This is essential if we want them to continue to plan for the future, and ensure their business stays on a solid financial footing. It stops larger firms using them as a free source of credit. PBAs are the first step in removing this financial headache for SME builders, decorators, roofers, plumbers, and electricians.
A PBA is a bank account set up by the main contractor and client. Money is deposited into the account by the client at agreed stages throughout the project. Once their part is complete, each subcontractor receives money directly from the account. This cuts the payment time from two or three months to around five days.
This trial is a step in the right direction. However, it should move beyond a trial and be fully adopted in Scotland for every project worth £1 million or more.
This legislation has already been passed in Northern Ireland, providing added certainty for SMEs. In a tough time, this is a welcome reform.
PBAs protect subcontractors in case the major contractor unexpectedly goes into administration, as the money is ring-fenced and secured for all participants in the project. PBAs have trust status to ensure the safety of the funds, which can only be paid to those named in the account, reducing abuse and mismanagement.
PBAs also save money. Delayed payments can result in unnecessary finance charges, and PBAs eliminate these. On a £10m project lasting 52 weeks with 16 subcontractors, they could cut costs by as much as 2.5 per cent.
This will add up to significant savings for Scottish taxpayers.
Deputy First Minister Nicola Sturgeon has joined the voices in favour of PBAs, saying they will “preserve Scottish jobs and retain indigenous skills and expertise”.
Announcing the initiative in April, she said: “Using project bank accounts guarantees a diverse and competitive marketplace, meaning that Scotland’s many SMEs are given the confidence to compete for Scottish construction contracts.”
This is encouraging and will hopefully lead to PBAs being adopted across the board.
However, unless they are adopted for all public projects of £1m and more – as in Northern Ireland – there is a risk that this legislation will fail to meaningfully reform the public procurement system.
Some may argue PBAs should only be used in rare, very large, projects. However this would dilute their effectiveness. Many projects worth £1m already involve multiple subcontractors. There is a clear need for PBAs to streamline the payment process in these cases.
Small and medium-sized businesses account for much more than half of private sector employment in Scotland. They are a key driver of our economic growth. Ensuring subcontractors are paid on time for work completed will improve the business climate for these companies, their employees and Scotland as a whole. A fair and modern Scotland will benefit greatly from PBAs.
PBAs are simple to set up quickly, improve financial transaction security, reduce paperwork and offer greater transparency for both the client and project participants. They allow SMEs to accurately plan budgets and grow their businesses. It would be a wasted opportunity for this not to move beyond a trial basis in Scotland.
• Grahame Barn is director of the Federation of Master Builders Scotland