Project bank accounts: Up close and personal

There has been a lot written about project bank accounts (PBA) in recent months. At times, however, the information has been rather inconsistent and confusing.

I was instrumental in setting up the PBA for the Defence Estates Andover North Site Prime Contract in 2001. More recently, I worked alongside Barclays and the Bank of Scotland developing their PBA products, and with the authors of the PBA versions of the standard forms.

I would like to clarify a number of misconceptions …

• PBAs are expensive to set up and operate 

This is not the case. Both banks have set up interest bearing accounts. The account is in credit for between three and five days (depending on whether it is a BACS or CHAPS payment) at each payment cycle and the period between the deposit of funds and payments to the delivery team. This is sufficient for interest earned to offset charges on most projects worth more than £5m.

Prompt payments also enable the supply chain to remove from their prices the costs associated with poor payment practices – financing, insolvency insurance and debt collection overheads. Add to this the discount that has been offered in principle, in return for guaranteed prompt payment, and the break-even point is even lower

• They involve a client pre-funding the project 

The project account is only a payment medium; the actual payment/certification process is unaltered. Instead of the money flowing from the client to contractor following certification, it goes into the PBA. From this the contractor and supply chain receive payment

• PBAs are only applicable to the upper levels of the supply chain 

Project accounts can be used at all levels of the supply chain. I’ve found that some subcontractors with small value work packages are put off by the introduction of anything

non-standard on one-off projects. Frameworks will make this easier, as the lower levels of the supply chain will be more willing to engage as they only need to learn the process once for a series of projects.

Educating the supply chain to the benefits of PBAs is important and the industry umbrella bodies, which have been canvassing long and hard for fair payments, have a part to play in this

• They are an attack on a contractors’ margins

 Main contractors may well realign their margins to offset any loss of use of their supply chain’s money, and this is allowed for in the 2.5% saving quoted in the Office of Government Commerce’s guide. For most responsible contractors this should not be that significant. Equally it should not concern clients, as long as the overall trend from the use of PBAs is a reduction in prices. Where it might cause consternation is for contractors who abuse the payment process.

• They cut across contractual withholding provisions

PBAs don’t interfere with such provisions. If a lead contractor wishes to withhold money, it reflects this in the interim payment agreed with the client, and the subcontractor does not obtain its full application. A withholding notice will still have to be issued in accordance with the Construction Act. If the withholding exceeds the subcontractor’s entitlement, the lead contractor can make a further deduction in the following period, subject to a further notice.

One benefit of PBAs is that they provide greater transparency to the payment process, and help to eliminate any abuse of the set-off provisions

• The trust status doesn’t provide insolvency protection 

Trust status means that any money in the account is not the client’s or main contractor’s in the first place. The main contractor and subcontractors are beneficiaries of the trust. The protection offered by a valid trust is robust. From personal experience on a project where the contractor went into administration, the administrator tried hard to seize the proceeds of the PBA, but the trust status prevailed.

My experience is that PBAs improve the team’s focus on delivering value. Payment ceases to be a diversion and is replaced by trust and collaboration. Historically, a lack of genuine trust has hampered the industry’s efforts to achieve greater integration and collaboration. I didn’t say that – it was the National Audit Office in its March 2005 report, Improving Public Services through better Construction.