5 reasons clients prefer Project Bank Accounts

In essence, Project Bank Accounts are special-purpose ring-fenced bank accounts that are set up with trust status to be used on construction projects - the money destined for the project is paid in, and then the administrators of the Project Bank Account (or 'PBA') use that money to pay the supply chain directly each month.

While the traditional payment model (contractor works for a month, claims money, waits a month for payment, with an equivalent downstream process for all of the sub-contractors and sub-sub-contractors) can lead to payment times of 60-90 days or more, with a Project Bank Account the entire supply chain can be paid within 7-14 days.

Not only to PBA's represent best-practice in ensuring fair and prompt payment to the entire supply chain, improving the cash flow of all participants, they can also significantly reduce the risk of insolvency throughout the supply chain by ensuring that everyone is paid promptly for the work they have done - this means the whole project is significantly more likely to succeed.

1. Your money, your project

And only used for your project.

By far and away, the principle benefit of Project Bank Accounts is that as a client, your money is only used for your project.  In the traditional main contracting scenario, the client takes a risk on the main contractor's creditworthiness, placing their funds in the general pool of contractor funds that can be used for any of the contractor's projects.

If a contractor has a 'disaster' project (perhaps unexpected challenges are met on site; perhaps another of their clients becomes sanctioned; perhaps another of their clients cannot pay for another reason), they will have to use their general funds to cover their costs and their own downstream contractual obligations to their supply chains on all of their projects ('pay when paid' having been outlawed in 1998).  This means that even the most creditworthy, best-intentioned contractor might have a 'rainy day' that means suddenly their finances are stretched very thin.  

By implementing a project bank account, however, your funds are only passed to the main contractor for their bit of the work - all of your specialist sub-contractors, suppliers, and even your consultant team can be paid directly from the Project Bank Account.  If the absolute worst happens to your main contractor and they become insolvent, at least everyone underneath them in the supply chain has been paid up to date.  That means you won't have to pay twice if you need to bring in a replacement main contractor.

Contractor Selection

Anecdotally, we have received a lot of feedback from client representatives, project managers and quantity surveyors involved in competitive works tendering that the use of Project Bank Accounts also serves as a very helpful tool to mitigate the perils involved in appointing a tenderer with a lower price who perhaps has a lower credit rating or less experience in undertaking projects of the required size.

By using a Project Bank Account, the client team can much more comfortably appoint from a wider pool of possible tenderers, driving up quality and encouraging keener pricing by increasing the field of competitors for a project.

2. Cost savings

The received wisdom is that Project Bank Accounts are difficult to set up and expensive to administer - while this isn't our experience (we can generally get them open in a matter of days, and our pricing is significantly eclipsed by the risk and cost savings on offer), it is certainly something an argument that PBA proponents often encounter.

Keener pricing

Any perceived additional cost or complexity can readily be offset by the keener pricing on offer throughout the supply chain.  Anecdotally, our experience is that sub-contractors will be prepared to extend discounts of 3-5% on their works for a guarantee of prompt payment from a Project Bank Account, and those savings are compounded when one considers that everyone higher up the supply chain will be adding their own overheads and profit on those figures.

In addition to this, the whole supply chain has less cash flow to finance.  If sub-contractors are being paid in 7 days, and don't have to cover their own running costs, materials and work in progress for 60-90 days, they can afford to reduce their margins while still maintaining healthy net profits and ensuring their own ongoing viability.

The issue of compounded risk factors also factors into the price savings.  A third-tier sub-contractor is taking a credit risk not only on the ultimate client, but on the main contractor and the second-tier sub-contractor.  This risk has to be included in their pricing, given the prevalence of construction sector insolvencies, so the client pays for that.  The client then pays for the next tier up's risk factor, and OH/P on the lower tier's risk factor, and so on.

In total, therefore, the client is paying a huge sum of money to support a payment structure which exposes that same client to significant risks - the client is losing both ways.  

By employing a Project Bank Account, however, the client mitigates all the insolvency risk in the chain, and doesn't have to pay for that insolvency risk either.

Lower preliminaries

If you imagine a supply chain with one main contractor, 5 sub-contractors and another 5 sub-sub-contractors (not a huge supply chain in itself), that requires that every month, 11 businesses are organising and making payments.  The supply-chain compounding effect means that the Employer is paying for all 11, but through the main contract is also paying OH/P on the 5 sub-contractors and 2 x OH/P on the 5 sub-sub-contractors!

Not paying the various supply chain members for the administrative cost of making the payments and, instead, employing a Project Bank Account saves significantly on the resource and cost of the making of monthly payments.

No Employer payment overhead

While the main contracting / management contracting setup is effective at consolidating the payments for construction operations, the Employer is often left having to pay consultants, interior designers and even some specialist suppliers directly.  

Through a project bank account, however, all of this payment can be consolidated so that the client's own payment function does not need to accommodate the needs of the construction project.

Lower risk of interest/disputes/suspension

Sometimes, for whatever reason, it simply isn't possible to pay on time.  It may be that a second signatory is required and they are sick/on holiday/unavailable; or there might be a much more long-term issue - solvency, sanctions, asset freezes and the like - either way, late payment under a construction contract will generally mean that the Employer has to pay interest on the overdue sums.

In addition to this, in the event of a longer-term payment issue, late payment can entail suspension of the works (and all of the attendant costs), or even adjudication and expensive disputes.  These can readily be avoided by use of a project bank account.

3. Simplification of payments

Construction payment cycles are, necessarily, quite complex.  While on first blush, they appear straightforward, the proliferation of payment-related disputes, smash-and-grab adjudications and their enforcements, and the vernacular of payment certificates, pay less notices and retentions mean that unless the client is an experienced procurer of construction projects, any sort of payment obligations become all the more burdensome.

When the client is based overseas, or has their affairs structured through trusts, holding companies and/or family offices, this becomes more complicated still - governance requirements for signatories; trustee requirements for comfort and international money movement restrictions can all lead to an otherwise straightforward process becoming quite protracted.  

To compound matters, in the event a payment is made late, the spectres of interest, suspension and adjudication also linger on the horizon.  

PBA's make the process altogether smoother:  The Contract Administrator issues a Payment Certificate.  Unless a pay less notice has been brought to their attention, on the final date for payment, the project bank account will pay the invoice.  It's that easy.

4. Mandatory in government projects

Project Bank Accounts have found favour in public procurement projects in the UK and overseas.  

In England, since 2012, they have been an expected payment mechanism.  The Government briefing paper set out the reasoning as follows:

Simple though the concept is, PBAs directly deliver against a range of the aims of the Government Construction Strategy.  By addressing unfair payment practices, benefits will accrue to the whole supply team, by ensuring transparency of and certainty of payment. In particular, for the SMEs down the supply chain PBAs will protect their often very fine margins, obviate the need for unnecessary borrowing and can lead to a much more balanced trading environment, hence supporting growth. Cost savings accrue from supply chain members not having to chase payment or having to finance lengthy credit periods. PBAs eliminate payment disputes and the costs associated with them (which ultimately feed back into costs for the client).  They also help the supply chain concentrate on the job in hand and reinforce or facilitate team working. Increased trust leads to greater collaboration, which in turn incentivises innovation.

National Highways has made Project Bank Accounts automatic for all of its NEC suppliers.  According to Lloyd Biddell, head of cost intelligence at National Highways,

We have been using project bank accounts for over a decade and they have proven a great benefit to many of our suppliers. The current opt-in process can make the process daunting or confusing for our smallest suppliers, who are often the ones most likely to benefit from them. We are now making it even easier by automatically including them on project bank accounts unless they choose to opt out.

In Wales, for construction and infrastructure projects of £2m or more that are fully-, part- or grant-funded by the Welsh Government must use a Project Bank Account unless there are compelling reasons not to do so - where such compelling reasons are identified a decision report detailing those reasons must be completed and filed to allow for audit.  Policy Notice WPPN-0321 provides:

2.5 Small to medium enterprises (SMEs) play critical roles in the delivery of public sector projects through sub-contracting arrangements. Access to finance and cash flow are vital to any business and no more so than smaller businesses with limited resources. It is therefore essential that public sector clients ensure fair and prompt payment, not only to our tier 1 contractors but throughout their supply chains when delivering public contracts.

2.5.1 PBAs are ring-fenced bank accounts with trust status that act solely as a mechanism for making payments. PBAs replace the traditional multi-layered payment terms between subsequent tiers in the supply chain with simultaneous payments to the lead contractor and supply chain partners. Traditional payment methods have resulted in sub-contractors commonly having to manage 60-90 day, or longer payment terms in some instances, whereas payments via a PBA typically take between 3-5 days from the deposit of money into the account following certification of the payment schedule.

2.5.2 PBAs have the added benefit of streamlining payment processes for clients, contractors and sub-contractors. Sub-contractors further benefit from PBAs as they alleviate the time and cost burden of chasing late payments and dispute resolution proceedings by ensuring timeliness and certainty of payment.

Scotland also introduced Project Bank Accounts in 2019 for any project with an estimated value over £2m for building projects or £5m for civil engineering projects.

5. Transparency & Compatibility

Project Bank Accounts promote compliance with the principles of the Prompt Payment Code - payment is both more transparent and it is far easier to manage actual payment timescales.

The final benefit of Project Bank Accounts is that they are compatible with any kind of construction contract - they are simply a payment service which helps the client in delivering the physical payment required.

Conclusion

It's clear to see why clients prefer Project Bank Accounts - and although there are not 100's of Project Bank Account Suppliers, there are plenty of us and the exercise of opening and running one is much less complicated than you may have been led to believe.  Why not contact us if you'd like to find out more?