Project bank accounts are a bureaucratic and over-complex way of improving supply chain payment times that offer no advantages over standard 30-day payment terms, according to a report by contractor Willmott Dixon.
The contractor voluntarily chose to run primary school framework contract using a project bank account (PBA), a payment method currently being promoted for public sector contracts under the Government Construction Strategy.
Arley Primary School was a £3.6m, 52-week contract involving 50 subcontractors. The client was Warwickshire Country Council, via the Scape framework.
But following consultations after the trial the contractor said: “With existing Willmott Dixon payment terms being 30 days from valuation on all public sector frameworks, Tier 2 contractors gain no material cashflow advantage from the PBA terms”.
“If you’re on 60 or 90-day terms, a PBA is a massive improvement. But if they’re already paid in 30 days, there isn’t much differential, and it comes with more admin, and removes subcontractors’ option to take up Supply Chain Finance [early payment] options.”
Graham Dundas, Willmott Dixon
Graham Dundas, deputy chief finance officer, told CM: “Where people have responsible payment terms and stick to them, it works. Clients [on frameworks] have the right to come in and audit our KPIs, it’s part of the KPI reporting process. And a significant part of our turnover is on frameworks, so the majority of our payments are already on 30-day terms.”
“If you’re on 60 or 90-day terms, a PBA is a massive improvement. But if they’re already paid in 30 days, there isn’t much differential, and it comes with more admin, and removes subcontractors’ option to take up Supply Chain Finance [early payment] options.”
Other findings of the trial included: smaller Tier 2 contractors finding it difficult to understand and administer the accounting and tax requirements of PBA transactions; Tier 3 contractors – providing direct labour – being disadvantaged in comparison to their normal payment terms; greater need to employ qualified accountants and surveyors to maintain proper records and controls; and Tier 2 contractors finding it difficult to obtain payment details for Tier 3 contractors.
In addition, Willmott Dixon estimated its own additional extra staff and administration costs at £35,000, and one-off set-up and training costs of £60,000.
Describing the reasons behind the trial, Dundas said: “We wanted to operate one for real, we were conscious there was very little published in terms of the realities and practicalities of operating one. The Cabinet Office talks about the success rate, but most of the projects are large civils projects, or Highways Agency projects. Our client also wanted to trial one, so the timing was right.”
Dundas said that although take-up of PBAs on public sector projects is still low, they are frequently “on the agenda” for discussion during the procurement stages of a project.
“Typically, it’s down to the ultimate client to decide whether they believe it’s appropriate. But they’re in the documents, and contractors are often asked to sign up to say they’re willing to operate one, but at the moment not many clients see it as a significant benefit.”
