As most readers will now be aware, Carillion – the UK’s second largest construction company – went into compulsory liquidation on 15 January 2018, leaving an estimated £2 billion of unpaid debts to suppliers. Establishing the exact figure may take some time as PricewaterhouseCoopers, special manager to the Official Receiver, collects proof of debt from trade creditors. Whatever the figure, the financial impact on many suppliers will be devastating.
The debacle begs the question: how could the impact on the supply chain have been reduced? An obvious answer is the use of project bank accounts (PBAs). Almost 10 years ago NEC led the way with publication of a PBA supplement – now recast in NEC contracts as Option Y(UK)1 – and I launched it when chairman of the NEC Users’ Group. Many users regarded PBAs as a vital part of the collaboration required for NEC projects.
NEC Users’ Group platinum member Highways England is the most prolific user of PBAs, with consultants and contractors – right down to level 3 contractors – receiving their payments through them. As a result, the supply chains are being paid within 18 days of the assessment date under the main contract.
Mandated by governments
UK government policy is that PBAs should be used, ‘unless there are compelling reasons not to do so’. PBAs are mandated for centrally procured projects in Northern Ireland over £2 million. The Scottish government has mandated them for projects over £4 million procured by government bodies and, from 1 January this year, they are required for projects over £2 million procured by public bodies in Wales when funded by the Welsh government.
Regulation 113 in the UK Public Contracts Regulations 2015 requires public bodies to ensure that 30 day payment clauses are inserted in all subcontracts and sub-subcontracts. The statutory guidance accompanying regulation 113 advises that the use of PBAs will help ensure that payments are, in fact, discharged within 30 days.
In Australia, the Queensland government has just implemented legislation requiring use of PBAs for public-sector projects over £0.65 million and this could be extended to private-sector projects from 1 January 2019.
Benefits for NEC client and suppliers
PBAs mean that payments are assured and regular, thus reducing exposure to insolvency of the main contractor. They also help to minimise disruption to clients. When funds are in a PBA or have been paid out of a PBA to firms in the supply chain, work can continue while clients make alternate arrangements for completion of the works.
There are savings for clients too. Highways England estimates that up to 1% savings on project costs are being achieved through use of PBAs.
So, NEC clients should be asking why they are not using Option Y(UK)1 rather than why they should use it. In a few limited cases PBAs may not be necessary, such as where the works are of very short duration, but they really should be standard everywhere else.
The bulk of the value of any project is delivered by firms in the supply chain – the majority of which are small-to-medium enterprises. It would give them tremendous comfort if client organisations in the NEC Users’ Group publicly declared their intention to use Option Y(UK)1.