I read with interest the copious articles (8 February, page 62-65) regarding the Office of Government Commerce’s Guide to Best Fair Payment Practice and the follow-on subject of project bank accounts.
Both are desirable, both we can aspire to, and both make perfect sense, but neither will ever get off the ground while bears do stuff in the woods, the Pope remains Catholic and main contractors control the construction process.
Main contractors are not builders – not in the old sense of having a labour force that actually put things together. They are key holders of the employer’s site and labour agencies for the people that do the work, with a bit of management and security thrown in.
They make their margin as a percentage on each supplier, often referred to as main contractor’s discount, and a measure of risk depending on the complexity of the building and the probability of major variations. Nothing wrong with that – it makes a good business model.
The real money, however, is what you cannot see. Place all suppliers on a 60-day payment period, which is quite commonplace, invest this at, say, 4%, then miss the payment date by a week or more and bingo! A typical monthly £100,000 payment to a supplier can earn about £650. Multiply this by 12 monthly payments and again by 10 major trade contractors and you net a staggering £78,000 from one contract. Take any of the Major Contractors Group that typically have 20 or more contracts running and the figures starts making Premiership footballer grade.
It doesn’t stop there, though. We then move onto retention. No doubt some clients make life difficult and use the whole retention fund on the main contract to their own advantage, but given that it takes anything up to five years to get even small retentions released, the potential interest earning of retention funds is just as lucrative as the monthly cash flow exercise.
It will be like turkeys voting for Christmas if main contractors adopt the principles of a project bank account.
Steve Medhurst
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