Peter Mandelson has agreed to tell public sector contractors, benefiting from the government's 10-day payment terms, to open up project bank accounts, to help SMEs' further down the supply chain.
Project bank accounts were agreed to be a good way of getting public sector contractors to pass on payment to second, third and fourth-tier contractors, at a meeting last week between Lord Mandelson, the Specialist Contractors Group's chief executive Professor Rudi Klein, and Labour MP Claire Curtis-Thomas.

Lord Mandelson, the Secretary of State for Business, Enterprise and Regulatory Reform has pledged to help SME's faced with financial exposure during the economic downturn. He is looking to send a joint letter from himself and the Chancellor of the Exchequer to public sector first-tier contractors, recommending they set up project bank accounts for all new public sector contracts.

Professor Rudi Klein said 'The government can't make it mandatory but they can recommend that project bank accounts be standard practice. There is no stick, but I doubt many public sector contractors would say no to the government. If a significant number of contractors did, we would push for these firms not to get public sector funding.'

When companies seek to boost their own margins by holding on to cash, this increases the overheads of firms downstream. A project bank account provides a safe place for payments that are due to each member of a project delivery team on a construction project. The account is protected by a trust arrangement so that, upon the insolvency of a main contractor, payments will pass to the supply chain rather than be held by the insolvency practitioner.

Barclays Bank and the Bank of Scotland have already put systems in place to help firms looking to set up project bank accounts. SMEs looking for more details about project bank accounts can visit www.ogc.gov.uk