New supply chain used by Highways Agency allows construction SMEs working on government property to receive prompt payment.
9 February 2012
It is not unusual for some SMEs in the construction industry to have to wait for up to 100 days to receive payment for their work - a situation that can damage their cash flow and harm their business. But the supply chain on the M4/M5 managed motorways scheme (Bristol) and the M62 J25 to J28 managed motorway scheme (North Yorkshire) will see a huge change in the way they are paid.
The Highways Agency has implemented the pioneering new way of paying its supply chain that will see construction SMEs working on government projects receiving payment within a few days from the due date.
Both schemes are under construction now, with work getting underway on the M62 in October 2011 and on the M4/M5 on 25 January 2012.
Over the next three years, the Agency proposes to use this approach on over 20 construction and maintenance schemes which will benefit hundreds of companies, including smaller companies, involved in the projects, and see a total of over £2.5bn flowing through the new system.
The Cabinet Office is working with public sector construction procurers to extend the use of these accounts. This year alone, over £500 million worth of projects have already been signed up to use Project Bank Accounts and this will rise to £4 billion by 2014. This rapid roll out will see the SME friendly approach used for almost 20 per cent of the spend in government construction projects in three years’ time. A project bank account is a legally ring-fenced and protected bank account from which payments are made directly and simultaneously to all participating members of the supply chain. SMEs using the PBA will no longer have to wait for prime contractors to process their payment; instead they will receive it directly through a bank account specific to the project they are working on. The system is simple enough but for these small companies it will make a huge difference. The move is set to revolutionise the way the construction supply chain operates, an industry in which around 99 per cent of businesses are SMEs. The government is also expected to publish new data on construction industry costs and savings on Friday. The construction sector is a major part of the UK economy - it’s 7 per cent of GDP, and almost half of this (40 per cent) is from public sector construction.
Minister for the Cabinet Office, Francis Maude, said:
We are leading the way with this approach to paying suppliers, and where better to do so than in an industry where 99 per cent of businesses are SMEs. Project Bank Accounts mean SMEs in the construction industry will be paid faster, freeing them of the burden of juggling with their cash and allowing them to focus on expanding their businesses.
If you run a small company and you have to chase payment, it’s not only stressful, running around and spending time chasing invoices increases your costs even further. Companies involved in these projects will no longer have this headache. We will extend these further across the sector over the next two years.