By Louise Stewart, CEO, ProjectPay.

360 housebuilders went bust in the past financial year – an increase of 75% from the previous year. This doesn’t include larger construction firms who are also experiencing high rates of insolvency amidst the UK’s current economic turmoil.

The sector is increasingly under pressure, already suffering from abnormally high rates of business insolvencies, and post-covid inflation alongside public spending surges on construction projects means that even more businesses are expected to go to the wall.

Operating on a ‘project-based structure’, the industry delivers projects involving multiple companies, with main contractors typically purchasing services from a wide range of contractors for ‘sub-projects’ within complex project hierarchies.

With increasing rates of insolvency housing associations (HAs) are therefore having to rethink their relationships with SME house builders and contractors to help ward off insolvencies and provide stability to development pipelines.

Inflation and the residual supply chain impact from Covid also means that the housing supply situation itself could also soon get worse due to payment problems for SMEs.

As a consequence, HA funds are being unnecessarily wasted in numerous cases across the country and this is contributing to the underlying challenges with public sector housing generally.

Having worked with governments in the UK and Australia about this issue I’ve seen first-hand how significant an issue this can become in periods of financial instability.

In light of the issue, discussions are already taking place with transformation directors within HAs 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 sat with the use of project bank accounts (PBA) – a solution that is being used in the public sector 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.

In fact, the UK government has recently recommended that all projects should use a transparent payment mechanism that uses these PBAs on all major construction projects.

Project subcontractors are paid directly from the PBA at the same time as the main contractor, rather than the main contractor being paid into their business bank account and the subcontractor waiting for their payments to be passed on.

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. 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 HA 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.

These digital wallets 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.

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 don’t 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 removing late and no payment issues. With the construction industry accounting for 25% of all business insolvencies and main contractor insolvencies leaving subcontractors unpaid (with projects delayed or cancelled), this frequently impacts HAs ability to deliver more social housing.

The new approach solves these challenges and delivers on the needs of HAs. 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 certainty on HA projects.

PBAs have become extremely unpopular with builders in the construction industry. They’re difficult to set up, have complex legal requirements, require a lot of administrative burden and tie up the working capital of main contractors.

The hope for HAs now and through 2023 is that the new solutions will facilitate scaled adoption by the sector. This will 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.