The Scottish government's announcement that Project Bank Accounts (PBAs) are to be used as the preferred method for improving payment conditions and speeding up cashflow on all public sector construction projects valued over £4 million has been hailed as a major step towards greater financial stability for the industry.
Derek Mackay, Scotland's Cabinet Secretary for Finance, announced that this method of protecting payment to sub-contractors in construction supply chains will be imposed on all projects procured by Scottish government departments from 31 October this year.
The Building Engineering Services Association (BESA), which represents specialist engineering contractors and was heavily involved in the campaign to have PBAs introduced, congratulated Mr Mackay and called for the rest of the UK to follow suit by implementing a policy that could improve financial conditions for the whole construction sector.
"Unfair and abusive payment practices have been a blight on the construction process for decades," said BESA chief executive Paul McLaughlin. "The Scottish government should be roundly praised for taking a bold step to remove one of the barriers to efficient project delivery."
PBAs are a cash disbursement model that allows money to be ring-fenced in bank accounts from which payments are made directly to suppliers. This reduces the risk of contractor insolvency and the consequent disruption to projects. It also cuts out much of the additional cost of risk pricing and debt management associated with having multiple layers of payment within the contractual chain.
PBA payments can be made within as little as 12 days and, once in the account, the monies are protected from upstream insolvencies and unfair delays. Public Highways England and the Environment Agency have been using this method for some time and, on average; 'Tier 3' sub-contractors on their projects are paid within 19 days.
"Security of payment allows firms to invest in the skills and processes they need to improve productivity and fund growth," added Mr McLaughlin. "By improving cash flow through the supply chain, project clients can also be assured of a more cohesive, harmonious and, therefore, efficient project process."
He also called for the introduction of digital payment platforms as the next step in the process of "remedying endemic industry payment problems". This, he said, would give SMEs the reassurance of transparent and legislatively compliant payment processes supported by electronic banking; allowing them "to plan for the future with greater confidence and commercial stability".
Scotland's First Minister Nicola Sturgeon was an early supporter of PBAs and launched a government trial of the payment mechanism in 2013 when she was deputy to Alex Salmond. This led to a recommendation of their use in Scotland’s wide ranging Review of Public Sector Construction Procurement.