Scottish Government mandates Project Bank Accounts

United KingdomScotland

The Scottish Government has recently announced that from 31 October 2016, Project Bank Accounts (“PBAs”) are to be used on building projects procured by Scottish Government bodies with a value of over £4 million and civil engineering projects with a value of over £10 million. We provide an overview of the benefits, disadvantages, and primary characteristics of PBAs below.

Introduction

As reported in our Law-Now entitled, Promoting faster payments through the construction supply chain, the Scottish Government has been piloting the use of PBAs in Scottish public sector led construction projects over the past year. This complemented statutory guidance accompanying the Public Contracts Regulations 2015 in England in which the use of PBAs was promoted unless there was a good reason not to do so. In early 2013, the Northern Ireland Executive announced plans to introduce PBAs on all contracts over £1 million. Indeed, giving increasing effect to fair payment themes, standard form PBA documentation has also been published by JCT, NEC and PPC2000. It will also feature in the new 2016 JCT editions.

PBAs are not a new concept but are gaining favour in the face of growing pressure on projects brought about by the increasing occurrence of insolvency within the contractual chain, leaving parties unpaid and jeopardising projects. Amidst the industry concerns in the wake of Brexit and in light of recent high profile insolvencies, it comes as no surprise that, following successful pilots in the last few years and the Review of Scottish Public Sector Procurement in Construction, the Scottish Government has gone one step further and announced that from 31 October 2016, PBAs are to be used on building projects procured by Scottish Government bodies with a value of over £4 million and civil engineering projects with a value of over £10 million. A Scottish Procurement Policy Note (SPPN 10/2016) has been published along with guidance to enable the local implementation of PBAs.

Project Bank Accounts: an Overview

The announcement has been widely welcomed by construction industry trade associations, with particular reference to the boost it will give smaller businesses in the contractual chain who are often the first to lose out in the event of insolvency or poor payment practices. However, PBAs have their critics and so it is an opportune time to revisit the hallmarks, pros and cons of PBAs:

Hallmarks:

  • Generally set up in joint names or in the name of the Main Contractor or Employer alone.
  • The contract will include a mechanism for calculating the sum that the Employer must pay into the PBA so that timeous payments are made to the supply chain.

Pros:

  • Helps secure or “ring-fence” payments against the risk of insolvency.
  • Allows the Employer to take greater control over the payments to sub-contractors.
  • Improves cash flow, relieving parties further down the contractual chain from the delay caused by the traditional payment chain with regular and timeous payments.
  • Reduced disruption to projects in the event of insolvency.
  • Improved collaboration on projects (as envisaged by the OCG’s Model Fair Payment Charter).
  • Underpinned by legal trust status which can ensure, for example, that payments due to sub-contractors can be excluded from assets deemed to belong to an insolvent Main Contractor. Parties should ensure that when setting up the PBA, they also set up an adequate trust deed setting out the terms of the trust on which the money in the PBA is held.
  • Parties can agree to include the retention sum in monies held in the PBA which is of particular benefit in the event of Employer insolvency.
  • Transparency.

Cons:

  • Can be expensive to set up and administer currently making them an attractive option for larger projects only. Lower value projects that do use PBAs may exclude suppliers in the arrangements given the extra administrative expense incurred in doing so.
  • PBAs do not appeal to everyone, given the slow uptake in the industry.
  • Require to be properly set up to work effectively, involving negotiation with all parties to the contracts using the PBA, which might not be feasible.
  • Project teams are generally unfamiliar with PBAs. Proper training is required so that a PBA can be effectively used. Tight procurement timescales do not allow for PBA establishment time.
  • Can reduce the control a funder or Employer has over a project if money is tied up in a PBA.
  • Can reduce the Main Contractor’s ability to use payments from the Employer as working capital before it is required to pay others.

Points to bear in mind:

  • PBAs do not cut across contractual payment mechanisms. An Employer can deduct sums for say defective workmanship (providing it is justified), but this may mean that the Main Contractor is required to pay in extra money in the meantime to ensure that there are sufficient funds in the PBA for payment to sub-contractors and suppliers.
  • Parties should avoid setting up an account with overdraft facilities.

Conclusion

The future success of PBAs will largely be driven by Employers (who will generally bear the majority of PBA establishment costs). Old habits die hard and even the most innovative and forward thinking Employers will likely desire to see an overall cost benefit (by way of a reduction in construction costs) to be motivated to effect change. It is no doubt hoped though that the Scottish Government’s move, together with the increasing amount of guidance published by various industry bodies, will prompt more of a commitment to using PBAs and a higher take up generally across the construction industry. Whether that is achieved of course remains to be seen.

References:

Scottish Procurement Policy Note 10 2016, Implementation of Project Bank Accounts in Construction Contracts

Scottish Government, Implementing Project Bank Accounts Guidance