Introduction
Project Bank Accounts (“PBA") are often suggested as one of the solutions to the construction sector’s problems. At the moment, PBAs are under the spotlight in the context of the Public Sector Supply Chains (Project Bank Accounts) Bill. The bill proposes that all payments on government and public authority contracts worth more than £500,000 be made through a PBA. The uptake of PBAs in the industry has, to date, been lacklustre. Employers on private projects have generally been resistant to reducing their control over their money by tying it up in a PBA. Contractors do not like to lose the benefit of cash flow. However, the payment issue is one that needs tackling and so it is worth reconsidering the longer term protections that PBAs can offer.
How do PBAs Work?
Most commonly, the PBA is set up in the joint names of the employer and the contractor. In some instances, the PBA is set up solely in the name of the employer or contractor depending on who is to have authority to deposit funds into the PBA. The building contract for the project needs to make provision for the operation of the PBA. For example, the standard form JCT contracts need amending to allow for the PBA. The building contract will need to include a mechanism for calculating the sum that the employer must pay into the PBA. It will also be important to consider payment timings so that the contractor, sub¬contractors and suppliers who are parties to the PBA arrangements can be paid promptly and on time.
Consideration will also have to be given to who will be responsible for administering the PBA. Quite often this will be the project manager, or contract administrator under the building contract. The appointments of these consultants will need to include comprehensive services covering their role in administering the PBA.
PBA documentation
Both the JCT and NEC publish optional project bank account materials that can be incorporated into the building contract, although further bespoke amendments may be necessary. It is important to ensure, for example, that the drafting covers the scenario where an employer needs to make a deduction for defective work. PBA arrangements must still allow an employer to "enforce" that deduction.
One of the key concerns for contractors when a PBA is proposed will be whether the PBA creates a trust. Although it has not been tested by the courts, it is widely thought that if a trust exists and the employer becomes insolvent, the funds in a properly drafted PBA will not be swallowed up with the employer's other assets. Rather, the money can be used to pay the contractor and sub-contractors. The optional drafting for the NEC contract requires the parties to enter into a trust deed. The JCT documentation attempts to create a trust but critics have questioned whether in fact it does, primarily because there is no requirement in the JCT provisions for instructions to be given to the PBA bank when monies are paid into the PBA as to how these should be allocated. In a scenario where the PBA bank is not given instructions that the monies are to be held in trust for the contractor and sub-contractors, the supply chain may struggle to succeed with an argument in an insolvency scenario that the monies are "theirs".
Benefits and problems with PBAs
PBAs have the potential to assist in speeding up payment and reduce the risk of cash flow problems in the contractor's supply chain (including in relation to retention payments). Sub-contractors are not reliant on the contractor being in funds to make payment, rather a PBA facilitates payment to all parties in the supply chain simultaneously, significantly shortening payment periods for suppliers further down the chain. This said, most private employers to date have been put off using a PBA because they can be expensive to set up and run. There will also be time involved at the outset in negotiating the terms of the PBA documentation between the parties. This process has to be repeated for each project if the key parties are different. More generally, many in the industry argue that some of the sector’s fundamental problems - tight margins and a lack of profitability - are what need sorting, and that improved payment practices will follow without the need for complicated contractual arrangements.
Final thoughts
It is likely that the government will continue to support the use of PBAs by public sector organisations. The Scottish Government has recently aligned itself with the Welsh Government in reducing the threshold for mandatory use of PBAs to £2 million. Within the private sector, PBAs are increasingly viewed as palatable on large-scale projects, but their wider take-up remains in doubt.
