As one of the world’s largest sectors the construction industry engages a vast number of small businesses to complete work on projects. As a sector already known for high rates of business insolvencies, inflationary pressures are seeing even greater numbers of businesses failing.

Operating on a ‘project-based structure’, the industry delivers projects involving multiple companies creating complex contractual hierarchies, which makes payments or security of payment, a problem.

To address some of the payments issues created by this complexity, Project Bank Accounts (PBAs) have historically been used, as ring-fenced bank accounts which provide an alternative payment mechanism on 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.

In fact, the Government has recently recommended that all projects should use a transparent payment mechanism and recommended the use of project bank accounts on all construction projects, public and private.

Project subcontractors are paid directly from the PBA at the same time as the main contractor. But PBAs still have 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. Also, how to effectively implement them is frequently misunderstood and they require significant paperwork and spreadsheet administration.

They tie up the working capital of main contractors and only protect payments for the top tier contractors. They have also recently been shown on a UK government project to be ineffective in protecting payments to lower level subcontractors when a contractor collapses.

In traditional construction supply chains, main contractors pay subcontractors, who then pay their sub-subcontractors, this can add delays and increase average subcontractor costs for projects of around 5-10%. And if the main contractor’s business collapses subcontractors don’t get paid at all for work completed.

The construction sector is renowned for a vicious cycle of working capital dysfunction. This is created by limited access to affordable working capital due to this contractual chain payment risk resulting in high rates of non-payment and business collapse in the sector – with small and micro businesses most exposed to risks with the majority of their business assets tied up in unpaid invoices.

With the payment risk that the hierarchical payment chain creates, at least 32% of business assets are made up of accounts receivable. This is more than any other industry and further highlights the extent of the counterparty risk faced within the building and construction industry. 

This dysfunction is made worse by the power imbalance between large main contractors and the small businesses – who become default financiers on projects. In fact, main contractors often use money owed to small business subcontractors as their free working capital to spend as they please. This provides an incentive to delay payments to small businesses for as long as possible.

To address this, a 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.

These reduce project costs and 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.

On an industry-wide level this provides a collaborative, scalable and secure payment platform that makes the entire construction project payment process simpler, faster and protected for everyone. 

Project bank accounts require the drafting of complex legal agreements which means they are typically only used on large government projects. But these new platforms allow all parties to quickly sign up to a building project’s wallet, agreeing to the wallet’s terms of use electronically when they are joined to the digital wallet as part of the simple onboarding process – making it easy for them to be used on any size of project big or small, public sector or private. Everyone across the project’s supply chain is joined to the project wallet and can benefit from guaranteed project payments made by the contractually agreed due date or immediate invoice payments if they register for them and agree to the merchant fee.

Primarily, they offer reduced costs for subcontractors in managing working capital, while removing the risk of non-payment and increasing trust by providing payment certainty. This facilitates lower subcontractor costs, ensuring lower project budgets and freeing up cash to invest in more housing stock.

But they also provide a range of further benefits, including:

• Visibility and control
• Lower administration
• Fully secure, fast payments
• Robust supply chains
• Full compliance
• Reduced risk

So those who typically look at PBAs for certain projects should now look at new project wallet solutions that are becoming available, which address and overcome all the limitations PBAs.

These new solutions substantially increase the sector’s cost benefit and outcomes savings compared to PBAs which only benefit top tier contractors.