With the use of project bank accounts on the increase, it’s time to knock some misconceptions on the head

Rudi Klein

The government is now well on its way to achieving its target for introducing project bank accounts (PBAs) on public sector works. By 2014 £4bn worth of government construction should have been paid for through the use of PBAs.

The government says that PBAs must be used unless there are compelling reasons for not doing so.

Local authorities and utilities are now beginning to use them on their projects. Both the Welsh and Scottish governments are giving them serious consideration. Guernsey has already used a PBA.

But, as the use of PBAs increases, there are still many misconceptions among both industry and clients. Here is a list of some of them, along with my responses.

PBAs are only for big projects

A PBA may be suitable for a £1m project (or even smaller) if there are numerous subcontractors. But if there is a large project with only two contractors a PBA may not be necessary.

The client has to pre-fund the PBA?

Money is only paid into a PBA as and when the client agrees the relevant application for payment.

Traditional payment systems are more suitable for Victorian times than for modern day business. Project bank accounts are about an increasingly integrated industry

PBAs are expensive and bureaucratic to set up

The opposite is true. They are cheap – about 15p per payment. Furthermore the interest gained on the money while in the PBA (usually no more than five days at a time) is likely to meet the bank’s costs for setting up and operating the account.

The paperwork is actually minimal. The major banks such as Barclays, Bank of Scotland and HSBC have standard documentation.

Contrast all of this to the bureaucracy and expense involved in having myriad payment systems on projects and the continuous chasing of outstanding payments.

PBAs won’t stop payment abuse completely

No, but they will substantially reduce it. Campaigns for 30-day payments are all very well but while the payer has the cash there remains the temptation to hang on to it.

Issuing pay less notices could be difficult

The key point is that a PBA is simply a safe receptacle for the cash. PBAs did not cut across existing contractual/statutory obligations or entitlements.

With cash going through a PBA, contractors could suddenly lose a slice of their turnover

Incorrect. Lead contractors will discharge supply chain payments through the conduit of the PBA. For VAT purposes lead contractors will continue to bill clients for the total value of the work; payments will be entered into the contractor’s books and used to calculate turnover (see Financial Reporting Standard FRS5 issued by the Accounting Standards Board, November 2003).

A PBA doesn’t offer any protection against the insolvency of a client or lead contractor

Provided the money in the PBA is ring-fenced as trust money, insolvency practitioners cannot lay their hands on it. It is better to have at least two trustees - perhaps the client and lead contractor. If there was one trustee who went into insolvency, there could be a hiatus in the administration of the PBA.

The supply chain could be “out of pocket” if there is a shortfall in the PBA

A PBA does not operate as a pay when paid mechanism. If, for whatever reason, there is a shortfall the Tier 1 contractor is still required to pay what is due to Tier 2 contractors and the same for Tier 2s with respect to Tier 3 contractors.

There is no advantage to clients in having PBAs

The government is not insisting on PBAs for the fun of it. PBAs will help to achieve the government’s target of 20% savings on construction costs. On a typical £10m project lasting 52 weeks with 16 subcontractors, the government expects savings of up to 2.5%.

The inefficiencies arising from traditional payment processes are exorbitant (ignoring all the disputes flowing from late/non payment). Crossrail primarily uses PBAs because they have the potential to minimise disruption resulting from insolvencies (especially lead contractor insolvency).

There is a dearth of guidance on PBAs

This assertion would have been correct some months ago. However the Cabinet Office has recently published its Guide to the Implementation of Project Bank Accounts, which can be downloaded here.

This guide also lists the minimum requirements for setting up a PBA.

Our traditional payment systems in construction are truly archaic. They have more in common with Victorian times than modern day business. PBAs are about a more integrated industry that works together without the distraction of payment delays and abuse. Moreover, they provide greater transparency, which is of benefit to both clients and project participants

Professor Rudi Klein is a barrister and chief executive at SEC Group