Tom Fleming looks at how Project Bank Accounts are helping to overcome payment issues in the development sector.
As the construction sector continues to suffer, it often appears as though suppliers, sub-contractors and advisors are being dragged down by forces beyond their control.
However, one of Birmingham’s most experienced chartered surveyors reckons there are usually signs that a company is starting to spiral out of control – long before the administrators might be formally called in.
Steven Jelfs, a director and co-founder of Fusion Building Consultancy, believes firms working for clients in the construction industry just need to identify the clues.
“If you’re working for a client, you obviously have to trust them, or the partnership would never work. However, it never hurts to know what to look for if things happened to go wrong,” he said.
“In the current climate, even successful construction companies run by good people are going under. You need to ensure you don’t go with them.
”If a sub-contractor has problems, you’ll usually be able to survive. If a main contractor suddenly goes bump though, then you will have serious difficulties.”
Jelfs says clues to a company’s financial health can often be noted on their sites; in terms of both personnel and the progress of the project.
“Out-of-sequence working is always an indicator that something is wrong. You might be on a residential scheme, and it will have been agreed precisely when the electricians, the plumbers, and the plasterers will be coming in,” he said.
“Then you notice that two rows of houses have had their bathrooms fitted, but there has been no wiring going in, or you notice that the roofers haven’t been seen for more than a week, and then a new sub contractor arrives.
”Turnover of site managers is also always worrying. If the site agent changes during a project it is unusual, but if you find yourself dealing with the third or fourth agent, you really should be concerned.”
Discovering that a main contractor’s credit rating has been reduced is another clear indicator of troubles ahead.
“It doesn’t matter who the firm is, or how large the project, sub-contractors and other suppliers will then struggle to protect themselves through credit insurance,” says Jelfs. “If you do want to keep on working for such a contractor, you must protect yourself, perhaps by making sure a bond is in place, or tweaking your contract in relation to possible insolvency.”
Delays to agreed payment schedules should also be treated very seriously, however sizeable the company, or however long their trading record.
“The collapse of Wrekin Construction seems to have taken many people by suprise, but we knew months earlier than something was badly wrong,” said Mr Jelfs.
“We were on one of their sites, and it was obvious that the company was failing. They couldn‘t get their subbies to come back to complete earlier stages of the scheme, and it turned out Wrekin owed them a significant amount of money.
Unfortunately, the construction sector has long been notorious for its refusal to adopt fair payment methods.
Even the largest and most successful companies have shown themselves quite willing to cut off payments to suppliers and sub-contractors, if they have short-term cash-flow problems, regularly pulling small firms in danger, and in some cases insolvency.
Traditionally, bonds, or guarantees by a parent company, have been seen as the best way to reduce the potential impact of such problems.
However, Gavin Stephens – a fellow director with Jelfs at Fusion’s Ludgate Hill consultancy – is a firm believer in the concept of project bank accounts, or PBAs.
“The Office of Government Commerce mooted PBAs as the single most important way of resolving payment issues, and although they were thinking in the context of the public sector, we think they fit equally well into a private sector mindset, especially in the current market,” he says.
“Essentially, an account is set up between a client and a contractor, its operations are governed by a trust deed, and a trustee ensures that everything works smoothly.
“Funding is put into the account before the project begins, and as it proceeds. Even if the company later went under, the receiver couldn’t touch the money, as it is ring-fenced.”
Fusion has worked closely in recent months with the Birmingham office of national law firm Shoosmiths; and in particular construction associate, Simon Wain, who also sees significant merit in the use of PBAs.
“In the current volatile conditions, especially in a sector so badly hit by the downturn, everyone is trying to protect their own interests,” he said.
“These accounts offer advantages in terms of payment timings, create a more secure relationship and offer greater transparency. You can use a PBA to make payments to sub-contractors, and the trust prevents main contractors from preventing due payments.
“If the project had an end development value of £5 million, you obviously wouldn’t put the full amount in upfront, but you would most likely put in between £1 - £2 million.”
Wain also believes that establishing a PBA may even help attract end-users to the scheme.
“It doesn’t matter if you are building homes, or a new office building, potential tenants need to feel secure about delivery, and the creation of a ring-fenced account does offer certainty that the work will proceed smoothly,” he said.
”We acted for the administrators of two Chase Norton companies, with regard to a prime residential site in Harborne, which was 75% built. As it was being built and funded by the same group, it took six or seven months to unravel everything.
“If a PBA had been in place, everyone would have saved much time and money, the scheme would have proceeded, and the sub-contractors and suppliers would not have lost significant amounts.”