Our team: Oliver Tobin
Delayed payments, overrunning costs and insolvency are an increasingly common reality of construction projects in the United Kingdom. The insolvency of key members of the supply chain can derail a project, yet sub-contractors – who commonly work to tight margins – are often forced to wait months before receiving payment.
Developers should always be mindful of ways in which to mitigate and manage risks. Recently, the use of project bank accounts (PBAs) has grown in popularity as a means of doing so and has garnered growing favour with developers and funders.
What is a PBA and how does it work?
A PBA is a ring-fenced bank account with the sole purpose of facilitating direct and simultaneous payment to named parties in a project’s supply chain. Instead of flowing through the contractor, interim payments are made directly and separately from the PBA to those parties; usually the contractor and key sub-contractors and suppliers.
The developer makes payment into the PBA in advance of sums becoming due to the supply chain. Sufficient funds are maintained in the PBA throughout the project lifecycle to cover the cost of work in progress and other financial commitments.
Upon payment certification, each PBA member may withdraw the certified sum allocated to it instead of awaiting payment from those up the supply chain.
Why use a PBA?
Security – The primary attraction of PBAs is the payment security they offer. In the event of contractor insolvency, timely payment can still be made to the other members of the supply chain. This is desirable for developers and funders. The risk of having to pay sub-contractors and suppliers twice for the same work where the contractor has not made payment is removed and it may also be easier to replace an insolvent member of the supply chain, ensuring project continuity and programme are maintained.
Speed – Payments to the supply chain are expedited. Instead of flowing through the contractor and down the contractual chain, payments are made directly to PBA members from the PBA.
Savings – Cost savings for developers have also been attributed to the use of PBAs. The administrative costs of continually chasing payments and the financing of lengthy credit periods – costs of which are ultimately passed on to the developer – are significantly reduced when using a PBA. The certainty of ring-fenced funds being held in a PBA also helps to ensure transparent cash flow management.
But bear in mind…
Whilst the use of a PBA may reduce the risk of payment disputes, this risk is not eliminated in its entirety. The normal contractual procedures that govern payment applications, valuations and certification must still be closely adhered to.
When using a PBA, developers should consider whether the terms of the governing PBA agreement neatly align with the building contract’s payment provisions. The building contract and PBA agreement should be clear on how a PBA is to be established, managed and funded throughout the project.
A developer should also ensure a PBA agreement provides sufficient control over the project funds. In particular, it should expressly allow the developer to make deductions from sums to be paid to the contractor, for example, in the event of defective workmanship.
If you would like any advice on this or any other construction matters, then our very experienced construction team would be happy to assist.