The construction industry needs to back new public procurement methods to ensure contractors do not fail despite owing less than they are owed themselves.
North-west Housing consortium provider Procure Plus chief executive Mike Brogan slammed the “ridiculous situation” occurring within the industry where contractors are regularly failing despite being owed often as much as twice what they owe creditors.
He insisted that this is why project bank accounts are crucial in ensuring liquidity among lower-tier suppliers, despite claiming the move is meeting fierce resistance from first-tier contractors.
Mr Brogan, who has been asked to give evidence to the government construction board on Procure Plus procurement, said the Cabinet Office is aligning itself with clients in a “battle” with first-tier contractors.
He said: “Some of the government clients, like the Highways Agency, are using more project bank accounts, which will make a huge difference because a lot of contractors are going bust owing half of what they are owed.
“That’s ridiculous and it’s all to do with cashflow and being starved of cash by first-tier contractors. One of the recommendations being looked at is that public procurement will employ PBAs on all schemes and eventually evidence will be there to show on those contracts there will be fewer lower tier contractors going out of business.”
Procure Plus sought legal advice on its procurement methods for the £130m new build framework after complaints from first tier contractors.
The framework is designed to ensure SME access by limiting the number of lots contractors can bid for to two out of five.
Chief executive Mike Brogan said contractors had complained that they were not allowed to bid for all lots, but have continued to bid after Procure Plus sought legal advice on the matter.
He said: “Tier ones have challenged us and criticised us because they want to bid for all five lots but we have taken legal advice and we’re allowed to say they can only bid for two.
“They have criticised us because they would like to close out the market but now they have accepted that it is the way it is and are bidding for Lots 4 and 5.
“You can work up and down the supply chain and you don’t have to run everything through the first tier. You don’t need the same principles for the Olympic Village when you’re building an elderly village.”
Main contractors are understood to be concerned over a lack of evidence on PBAs. However, government bodies including the Ministry of Defence, Environment Agency and Defence Infrastructure Organisation have committed to using them as part of a new procurement strategy.
Procure Plus is currently procuring a £130 million new build framework, which is at invitation to tender stage. Fifty-nine contractors have already expressed an interest, including Galliford Try and Wates.
The lots range from contracts for between one and eight residential units to Lot 5, which is for major schemes of more than 45 units. Contractors can only bid for two lots at a time (see box).
Mr Brogan said the framework is on course for the government’s required 20 per cent cost savings based on preliminary figures.
He added: “We have a six-unit and 17-unit housing scheme and a care home ready to go as soon as we have the framework is in place.”