Are project bank accounts the answer to late payment?

James Salmon, Director, 17th January 2019.

MP Debbie Abrahams, a campaigner against late payments has put forward a private members bill calling for payments on government and public authority contracts to be made through project bank accounts.

The Public Sector Supply Chains (Project Bank Accounts) Bill is due get its second reading in March. Although that is currently looking like a rather busy month for parliament.

Debbie Abrahams said: “When payments take a long time working their way along a supply chain from the contracting authority there is a risk that the cash could be cut-off at any time because of payer insolvency.

“We witnessed the catastrophic effect this has with the collapse of Carillion, a year ago to the day, with £2bn of unpaid invoices to their smaller suppliers.

“The precarious position of other major Government contractors like Interserve means urgent action is required.

“That’s why my ten minute rule bill will require government and public authority work be paid to suppliers using project bank accounts.”

The Federation of Small Businesses joined the call for the the Government to “radically strengthen” the prompt payment code and to name and shame repeat offenders.  The FSB also supports the call for  Government contractors on all major public sector projects to ring-fence cash intended for suppliers in these so-called project bank accounts. The FSB also think big companies should also be required to appoint a non-executive director with responsibility for supply chains.

During her speech Abrahams raised the case of Oldham based contractor Johnson Bros Ltd who lost £176,000 in unpaid invoices from Carillion.

Owner Neil Skinner was in Parliament to watch Abrahams’ speech.

He is reported in the Construction Enquirer as saying: “A few years ago Carillion were reasonably okay at paying our invoices, but even this was based on the fact that we could threaten to stop working in the middle of a job if we didn’t get paid for the work we had done up to that point.

“They paid us under these circumstances but only because they knew any delay would look bad for their performance index.

“Even so, payments still often went over sixty days, with a lot of chasing, and once the job for a particular customer was finished our sanction, to stop working, was gone and their payments just stopped.

“Carillion finally resorted to using all the familiar late payment tactics from finding fault with an invoice, referral to their accounts office in India, statement queries, disputed invoices paid, and so on.

“Then, lastly, they imposed a 15% non-negotiable discount on our work or they would send all unpaid invoices back to their QS department.

“We reluctantly signed this contract and they went ‘bump’ the Monday after signing and five days before the first part payment was due.

“As a result of Carillion’s late payment tactics small enterprises like mine have been suffering greatly, if not terminally.

“Large companies know late payment can destroy us small businesses but they rely on this tactic to ‘cook the books’ and be seen to be profitable themselves.

“Carillion went under owing us well over 15% of our average turnover and, following a difficult year last year, this money is much needed to help us survive.”

This Bill is fully supported by the Specialist Engineering Contractors’ Group representing the largest sector by value in the UK construction industry, and a leading late payments campaigner and advocate of project bank accounts.

Rudi Klein, chief executive of SEC Group said: “Given the precarious financial state of many of the UK’s major contractors Debbie Abrahams’ bill is now extremely timely.

“In fact it would now be very neglectful of Parliament or the Government to continue to ignore the concerns of SMEs in construction supply chains which have had to put up with payment abuse over many years.

“Project bank accounts are now acknowledged to be the most effective method of ensuring secure and regular cash flow.”

How to really break the late payment culture

James Salmon, Operations Director at The Credit Protection Association said  “Anything that can be done to tackle the late payment culture is a positive”

“However project bank accounts will only affect a very small percentage of the business that is done between businesses in the country on credit.”

“For the vast majority of companies being late paid by their customers, this will not help”

“Most trade on credit for goods and services is done with other  businesses who have an ongoing relationship with their supplier”

“While business customers are still able to threaten to remove future trade from their suppliers, they are able to get away with late payment without consequences as their supplier just sees late payment as an unavoidable cost of doing business and keeping the customer. The customer likewise sees it as easy and cost free cash flow.”

James Salmon added “late payment legislation provides the tools to truly change the culture. Late payment legislation allows suppliers to go back six years (due to the statute of limitations) and charge compensation and interest on late payments that happened in the past. This stops late payment from being a cost free cash flow booster”

“How will this change the culture?”

“Business customers may rely on their trading relationship with a supplier to get away with late payment, but as soon as that relationship ends, they face the prospect of being hit with 6 years worth of late payment compensation. Once that relationship ends, the supplier is fully entitled to go and ask for that retrospective compensation.

“Therefore, why risk late payment? Why operate with the risky of a large penalty looming over them?  It would be better for them to pay on time and avoid that risk”

“They may not even end the relationship themselves, the supplier might get into difficulties and realise they have this large untapped asset in late payment compensation that is available to them. Or the supplier might just look at all the late payments over the years, the hassle of chasing and decide that the business customer is worth more to them as an ex-customer than they are as a current customer”

“At present, not many suppliers are insisting on this compensation  and therefore it is not at the forefront of businesses minds. The more suppliers pursue late payment compensation, the more it becomes main stream, the more businesses will realise that the culture of late payment is not the magical free cash flow machine they thought it was and that it does come with a potential future cost.”

“Once they discover that every invoice they paid late, no matter how small, could lead to a compensation claim of at least £40, even if it was only late by a few days, then they are going to want to change their operating procedures to avoid future claims.”

With larger late paid invoices being worth £70 or £100 in compensation and with interest calculated daily at 8 percent above base then the costs of routinely paying suppliers late could be massive.

“They should quickly realise that it is better to pay their suppliers on time and instead finance their business’ cashflow through more traditional means.”

This doesn’t just mean deciding to write a cheque or instruct the accounts dept to raise a payment on the day it becomes due. If the payment arrives late, the penalty will still apply. No, to avoid the claim, those business customers need to make sure the payment arrives on or before the due date.  If  it arrives one day late then the full compensation is still due under the legislation.

“If payments start coming in on time, then those suppliers in turn will them have the cash to pay their suppliers and so on and so on….  The chain of late payment can be broken. The late payment culture can be stopped. We have the tools.”

“This isn’t an attack on business. Getting cash to flow faster through the economy can only boost our nations productivity.”

“Imagine a world where businesses and business owners spent more time working on productive projects and less on chasing payments!”

“Imagine a world where business owners could turn round jobs faster!”

“Imagine a world where business owners spent more time planning growth and new products and services and spent less time stressed over cash-flow”

“Breaking the late payment culture can liberate our nations small businesses and small business owners!”

How can CPA help?

If you sell on credit and have faced late paying business customers, then we can help.

At the Credit Protection Association, our members benefit from our debt recovery and credit management services which give them the tools to avoid and battle late payments. Opening up the financial freedom needed to grow and prosper.

The compensation is claimable under * The Late Payment of Commercial Debts (Interest) Act 1998 (with amendments), with which CPA are experts and can give free advice.

Our new Late Payment Compensation company, CPA (LPC) Recoveries Limited however can help suppliers unlock hidden potential and recover the compensation due to their businesses.

Integrating the historic ledgers and calculating the claims is a complicated process but CPA has developed the systems to do it. We also have the experience and expertise to collect the compensation and overcome the various objections.

We are passionate about wanting to end the culture of late payment and want to work with suppliers who feel the same.

visit our late compensation page

See our full blog and FAQ on late payment compensation

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The Credit Protection Association is a credit management company established in 1914. If you supply goods or services on credit then we can help you!

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