With numerous housebuilder insolvencies this year, the sector is facing pressure from several directions post Covid. The added impact of inflation and other public spending challenges around construction projects means that even more businesses are likely to fail in the coming year.
The industry operates largely around projects which involve several companies within the mix, and main contractors usually purchase services from a range of contractors for ‘sub-projects’ within complex project hierarchies.
Housing association landlords are therefore having to rethink their relationships with SME house builders and contractors to help prevent insolvencies and provide stability to development pipelines.
At the same time, housing association funds are being unnecessarily wasted in numerous cases across the country and this is contributing to the underlying challenges with public sector housing generally – and this poses a highly problematic issue during periods of financial instability.
In light of the issue, discussions are already taking place with transformation directors within housing associations that are looking for a better way to manage project payments. This is with the objective of ensuring prompt and fair payments to small businesses and to also secure payments in the event of main contractors collapsing.
These discussions are based largely around how to eliminate contractor payment risk to ensure payments are distributed across the entire building supply chain. But they also involve how to simultaneously manage multiple building projects per HA while gaining confidence that payments have been passed on to the small businesses in the supply chain, without adding unnecessary administrative burden.
Historically, the answer has appeared to be the use of Project Bank Accounts (PBA) - a solution that is being used in the public sector to attempt to alleviate the impact of builder collapse. These have been used for some time as ring-fenced bank accounts which provide an alternative payment mechanism on building and construction projects. They’re used by the UK Government to ensure that main contractors, and subcontractors in the supply chain, are paid and don’t face unreasonable payment delays due to the main contractor not passing on payments.
However, while the UK Government has recommended that all projects should use a transparent payment mechanism, main contractors continue to refuse to use these project bank accounts due to their complexity and subcontractors have complained they are ineffective anyway in protecting their payments. This was clearly demonstrated on a HS2 project earlier this year when subcontractors remained unpaid when a main contractor collapsed.
The PBA approach has several limitations and flaws which have hampered their uptake and use on building projects. They are difficult to set up and have complex legal requirements. How to effectively implement them is frequently misunderstood , and they require a lot of paperwork and spreadsheet administration. They also tie up the working capital of main contractors, only protect payments for the top tier contractors and are generally vigorously disliked by main contractors.
But there’s now a better way to eliminate contractor payment risk and distribute payments directly to the entire building supply chain, while managing multiple building projects per housing association with full transparency of payment across the supply chain.
This new trusted, collaborative and digital way to manage payments has been developed using secure digital wallets to remove the insolvency risk which results in non-payment from project payments. When provided with payment certainty secured subcontractors can reduce their prices by 5-10% according to a Deloitte Report* - providing substantial savings on project delivery.
These digital wallets also provide full supply chain payment guarantees well beyond the capabilities of PBAs. By ensuring payment for services performed they remove the financial contagion associated with outstanding accounts receivables impacting the supply chain. This changes the management of working capital without the additional administration and audit compliance costs of project bank accounts (PBAs provided by the major banks) borne by project owners and main contractors.
The new method works like this:
1. Main contractors and subcontractors sign-up online and are set-up in minutes.
2. Parties enter the usual building contracts on the platform, which do not impact on the usual contractual terms and are connected to the project digital wallet for payments.
3. Contractor and subcontractors submit all applications for payments on the platform which also get approved on the platform
4. Contractors can opt to wait for payments based on the agreed contract terms or they can register for a merchant facility to get paid immediately for a small fee.
This method is already making an impact in the UK by limiting certain social housing issues, with the construction industry accounting for 25% of all business insolvencies in the UK; With main contractor insolvencies leaving subcontractors unpaid, and projects delayed or cancelled, this frequently impacts housing associations’ ability to deliver more social housing.
The new approach solves these challenges and delivers on the needs of housing associations.
On an industry-wide level it provides a collaborative, scalable and secure payment platform that makes the entire construction project payment process simpler, faster and protected for all parties. This enables small business contractors with increased project payment engagement and transparency on housing association projects.
Builders in the construction industry find PBAs extremely unpopular and unfit for purpose. The fact they are challenging to set up, involve complicated legal requirements, and involve a heavy administrative load is a disincentive, but at their worst, they also tie up the working capital of main contractors.
This coming year solutions will become available that facilitate scaled adoption by the sector. This will properly address the building payment issue and substantially increase the cost benefit and outcomes savings compared to PBAs, that only provide a ring-fenced account and transparency of payment times for top tier contractors.
And there’s also a sustainability benefit. Not only do these collaborative payment solutions save time and money, they have recently created the ability to link carbon emissions generated from construction activities per trade package on projects, to reduce and offset them as part of the payment process. This is designed so that SME trade contractors can calculate, reduce and offset their emissions using trade-specific calculators - providing an incentive for supply chains to act on net zero targets, and allowing easy compliance to incoming regulation to cut emissions on construction projects.
Louise Stewart is CEO of ProjectPay
