PBAs can bring benefits to all parties in a contract

PROJECT bank accounts (PBAs) were the subject of a recent webinar hosted by the Construction Industry Coronavirus (CICV) Forum. David Rennie, Royal Bank of Scotland relationship director, joined professor Rudi Klein, CEO of the Specialist Engineering Contractors’ Group, to discuss the features and benefits of PBAs. Len Bunton, dispute resolution consultant, hosted the webinar. Following the event, Rudi Klein and Len Bunton answered Project Scotland’s questions about the PBA process and why, in their view, their use should be more widespread within the construction industry. 

Q) What is a PBA and how are they established?

RK: A PBA is an account which holds progress payments due to be discharged to the supply chain. The monies are ring-fenced by a trust arrangement. This means that the monies are not lost to subcontractors in the event of main contractor insolvency.

Q) What are the key advantages of Project Bank Accounts?

RK: For the construction client: project costs are reduced (Highways England has calculated that savings of up to 1% of project costs have been achieved by using PBAs).

For the main contractor: significantly improved supply chain performance and greater collaboration.

For the subcontractor: faster payments (12-15 days) because payments do not have to cascade down through different layers of contracting – everybody is paid from the same ‘pot’ at the same time. The whole payment process becomes much more efficient.

Q) What are the challenges? 

RK: The major challenge is getting all public bodies to use PBAs. PBAs help public bodies ensure that supply chain firms are paid within 30 days (as required by section 15(5)(d) Procurement Reform (Scotland) Act 2014. The Scottish Government is very keen that this should happen and has published excellent guidance to support public bodies. Royal Bank of Scotland has also been very supportive. Setting up PBAs with the bank requires minimum administration. It is best for public bodies to nominate one person to deal with the bank at all times.

Q) In what circumstances are PBAs currently used and what scope do you see for extending this?

RK: In Scotland PBAs are used for all building projects over £2 million. Over time I would like to see this reduced to £500,000. I would also like to see PBAs used more in private sector construction and in other sectors such as IT.

Q) Are there differences between the way PBAs are used in Scotland compared with the rest of the UK?

RK: There are 2 significant differences: Trust law in Scotland requires that main contractor and client are both joint trustees and joint account holders (which I prefer). This does not apply in the rest of the UK with the result that often the main contractor is the only account holder with minimum overall supervision by the client.

UK Government departments and agencies are required to use PBAs unless there are ‘compelling reasons’ not to do so. Unfortunately there isn’t a ‘policing’ system to check whether there are any ‘compelling reasons’.

Q) How would the insolvency of a trustee affect the operation of a PBA?

RK: The monies in the PBA are still protected. A trust arrangement is rather like a piece of garlic keeping Dracula – the insolvency practitioner – at bay (apologies to all insolvency practitioners, some of whom I count amongst my best friends).

Q) Are there circumstances where PBAs would not be appropriate?

RK: The most obvious would be where the project is of a very short duration or the value is less than £500,000. However even in these situations a PBA could be of use if there are a number of small firms in the supply chain.

Q) Does it cost a subcontractor any money to enter into a PBA?

LB: No. The Scottish Government has just published guidance that forbids payment of a fee to join a PBA.

Q) Does a PBA affect any of a subcontractor’s obligations?

LB: No. A PBA is primarily a safe receptacle for progress payments; the only changes to subcontracts would be those relating to the operation of the PBA. The key change will be that payments will be received in less than 30 days (Scottish Government has included some PBA contractual terms with its guidance).

Q) Other than the timing of payment does a PBA affect the valuation process or the amount of payment?

LB: No. A PBA does not impact on payment entitlement. All paying parties remain liable to discharge all due payments even if, for some reason, there is a shortfall in the PBA.