REUTERS | Mike Blake

Project bank accounts: five practical questions

I’ve got a multiple choice question for you: is a Project Bank Account (PBA)?

A. a simple mechanical process which allows for fast and secure payments to be made to the supply chain, cutting out slow payers;
B. a complicated pain in the proverbial which achieves no real benefit for anyone; or
C. a small animal living under my staircase (well, there is always one multiple choice answer you can rule out).

Whatever you think, PBAs, love them or loath them, are here and they are here to stay. Great if you answered “A”, but less so if you answered “B” or “C”.

PBAs: a simple idea

The idea of a PBA is a simple one: it aims to provide fast, secure payments to the supply chain.

Traditionally, money trickles its way very slowly down the contractual supply chain. An employer may take 30 days to pay its main contractor, the main contractor another 30 days to pay its sub-contractors, and sub-contractors another 30 days to pay sub-sub-contractors. This goes on and on right the way down the chain.

With a PBA, rather than the money having to go through all of those parties (and bank accounts), the employer pays funds directly into a single account. The money in that account is then held on trust for those supply chain members who are part of the PBA structure, and gets released directly to them. So a sub-sub-contractor gets its money directly from the PBA without having to wait for it to pass through the other links in the chain. As well as speeding up cash flow, having the money held on trust has an added benefit of giving the beneficiaries of the trust (the people entitled to be paid) security of payment in certain insolvency situations.

The right to be paid from the PBA is only a right to be paid the sum properly due under a contract in the first place. So, the PBA is a means of facilitating payment, rather than changing entitlement.

Issues to watch for

If you are thinking of using a PBA (as an employer) or are being asked to look at a project involving one, here are just a few of the things you need to think about:

Do the PBA provisions fit with the commercial deal?

That is, how much will be paid and when? It isn’t as obvious as it sounds when you remember that the PBA provisions will be set out in many documents: the underlying contracts, the deed which establishes the trust and dictates the rules around running that trust, and the documents controlling the bank account itself.

Does the Construction Act 1996 apply?

Every Construction Act-compliant contract must contain certain payment provisions. These include the service of notices dealing with how much is going to be paid and time limits by when they must be given. The time periods in the PBA structure must be sufficient to allow those notices to be given all the way down the chain. A common mistake is to assume that once an employer has served his pay less notice and transferred money to the PBA, it should all then automatically flow out to the supply chain. A sub-contractor will need an independent right to serve a pay less notice on its sub-sub-contractor, and the timescales must be sufficient to allow that.

Does it work with your payment structure?

For example, take a payment structure where the main contractor is paid for hitting agreed milestones. It is highly unlikely that all of the people below that main contractor in the supply chain will be paid in the same way. There will be lump sum and/or cost reimbursable arrangements at sub-contract level, meaning that there is no real link between the amount the main contractor applies for payment of, and what his sub-contractors are entitled to be paid.

Does the supply chain want it?

Early engagement is important here. Do the people who are intended to benefit from the arrangement actually want to sign up? The answer is not as uniformly “yes” as you might think.

Have you priced it?

There is admin involved in setting up and running PBA and someone needs to take that role. The parties need to acknowledge that this is a service like any other in the project, which needs to be paid for.

It can be done

In practice, none of the PBA issues are rocket science and most can be worked through with a little planning.

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