The £6 Billion Question: Why is construction still paying like it’s 1999?

We operate in an environment where payment terms are considered optional. We accept a culture where cash cascades unpredictably through complex supply chains like a slow-moving waterfall that often dries up before it reaches the people who actually poured the concrete or wired the lights.

The cost of this inefficiency is staggering. Late and non-payment costs the UK construction industry around £6 billion a year. But the human cost is worse: stress, mental health crises, and good businesses going to the wall because they couldn’t get paid what they were legally owed.

The Analogue Solution

The best answer to payment challenges in the past was to use a Project Bank Account (PBA). The concept is simple and sound: ring-fence the money in a dedicated bank account so it can’t be used for anything else, and pay the supply chain direct from that account. Where used consistently (e.g. by National Highways and the Environment Agency) PBAs have generally done a good job of protecting the supply chain. In fact, since 2010 the UK Government has mandated their use on public projects “unless there are compelling reasons not to”. In spite of this, they have not been broadly adopted across the public sector, and most in the private sector have never even heard of them.

PBAs have their weaknesses. They are an analogue solution in a digital world. They can take months to open. They require witnessed physical signatures from all participants on trust deeds. Those tasked with operating them complain that processing payments causes an additional admin burden. They can expose sensitive commercial information. Perhaps most importantly, they constrain cashflow, especially for those at the top of the supply chain, who may be so accustomed to holding other people’s money that they fiercely resist any attempt to restrict this.

Billions of pounds have successfully flowed through PBAs over the past decade and a half, but despite their benefits, use of PBAs remains relatively rare.

The Digital Evolution

Fintech has revolutionised how we buy coffee and split dinner bills. It is time it revolutionised how we build infrastructure, hospitals, schools, and houses.

The emergence of Digital Parallel Payment Accounts (DiPPAs) is a prime example. Think of a DiPPA as a PBA updated for the smartphone era. Under the hood lies a PBA, but the overlying technology addresses the weak points of a traditional PBA, retaining its benefits, and adding some new ones on top.

Their key difference from traditional PBAs lies in separating the authorisation of payments from the flow of cash. In a traditional project, money moves linearly: Client pays Contractor, Contractor pays Sub-contractor, and so on. In a project using a DiPPA, the authorisation still flows down the contractual chain, but the payment flows directly from the project account to everyone simultaneously. This means contracts and working practices go unchanged.

From an efficiency standpoint, this is a no-brainer.

• Reduced financial risk to all parties
• Lower project costs
• A more collaborative project environment
• Better governance and compliance

But the efficiency argument pales in comparison to the moral one. When a major contractor goes insolvent, the fallout is devastating. Everyone in the industry has  seen the headlines and knows people who have been directly affected. PBAs and DiPPAs ring-fence funds in trust. If a business fails, the money meant for its creditors on that project is safe - it cannot be swallowed up by administrators as it is not an asset of that company.

The Tools are Here

This isn't science fiction. DiPPAs are in use today. We are seeing first-hand how everyone involved with a project - investors, insurers, lenders, clients, consultants, contractors, and suppliers, can reduce risk and cost simultaneously. The "compelling reasons not to" use a protected payment account are gone.

Protecting the project’s money and its supply chain is a practical and ethical choice. We have the tools to stop robbing Peter to pay Pauline. We have the tools to ensure that if you do the work, you get paid. It is time we stopped paying like it’s 1999.