It is rare for a government procurement initiative to be so well received as has been the announcement that 20% of government construction spending will be routed through Project Bank Accounts (PBAs) within three years (see News). Small and medium enterprises (SMEs) are especially pleased as the announcement from the Cabinet Office means that suppliers will be paid within five days of due dates.
Larger contractors, who have benefitted from being able to hold onto large amounts of cash for long periods, using it as a cash flow boost, seem to have accepted the inevitable with good grace. Government had promised the move back in May 2011, when it said that using PBAs was recognised as a way of improving efficiency, and it was known that Infrastructure UK and the Cabinet Office Efficiency and Reform Group were working on the details, but it still came as a surprise when the announcement was made.
The Cabinet Office hopes the initiative will revolutionise the way the construction supply chain operates, saving some £40 million on the projects to use PBAs. Up to 2.5% of construction costs could be saved by using PBAs, the Cabinet Office says.
The mechanism is well enough known − essentially, SMEs on projects using PBAs don’t have to wait for main or prime contractors to process their payments, but receive them directly when entitled to them through a bank account set up specifically for that project.
The industry already has some experience of using PBAs as they are already proving their worth on a range of government projects worth over £500 million. This will now rise to £4 billion by 2014, according to the latest plan. The Ministry of Defence plans to use PBAs on all of its Next Generation Estates contracts, totalling some £5,000 million.
The MoD also plans to use PBAs on a £200 million contract to provide maintenance services on infrastructure in Germany; a £500 million contract for maintenance services on bases overseas; and a £40 million contract to provide a medical services centre at an army barracks in the midlands.
The Highways Agency plans to use PBAs on major construction and maintenance projects worth in excess of £2,000 million over the next three years.
The Specialist Engineering Contractors Association said the government estimate that projects equal to 20% of spending would use PBAs is conservative, and it intends to continue campaigning for fair payment from local authorities and the private sector. The 20% should probably be viewed as large scale pathfinders, and further adoption of PBAs might depend on how well they fare. A key limitation is going to be how the procurement skills of the client bodies square up, and the prognosis on that front does not look too good, at least judging by recent reports.
The low key response from the prime contractors so far is a bit surprising. They have to do something to off set the cash flow hit that they will be taking. We may need to wait to see how the initial 20% of projects get on with using PBAs, but it is unlikely that we have heard the last word on PBAs from prime contractors.
Nick Barrett
Editor