Project Bank Accounts (PBA) are a payment mechanism based on ring-fenced bank accounts created to increase the security of contractors and sub-contractors in a building project. Their main benefits include security and speed of payment and protection of funds in potential insolvency. Sounds too good to be true? PBAs are becoming increasingly common, and with the Government commitment to use PBAs "unless there are compelling reasons not to do so", their joint value in public sector contracts is expected to reach £4bn by this year. There are a few points to keep in mind if you are considering the use of PBA.
There are two common ways to create a PBA. Firstly, they can be set up jointly in employer's and contractor's names, on trust for the key subcontractors to ensure timely payments in the project. This way, the key subcontractors will benefit from the security of the trust. Alternatively, they can be opened in the name of the employer, ensuring contractor's authority to act by putting bank mandates in place. In either case, it is important that a separate account is opened, and that it is not used for any other funds (i.e. used by the employer for different purposes). If a separate account is not opened, it might be very difficult to prove that any protection should be granted in case of insolvency.
One of the basic principles of PBAs is the speed of payment. With a PBA, subcontractors working on lower margins should be less concerned about potential delays and difficulties in receiving payments due to them. The added benefit is that less money should be wasted on administration and chasing money as it becomes due. The Government estimates that as much as 2.5% of costs could be saved if PBAs were used across the construction industry. However, as with everything else, the accounts are not free. The cost of set-up and administration, together with project team training, may make the use of PBAs inefficient in small-scale ventures.
One of the biggest benefits of PBAs is associated with potential insolvency of the employer. If appropriately implemented, the account could secure the funds from other creditors. However, it is crucial that a trust obligation securing the money is properly established. In Scotland the situation is more complex than it might be in England. For example, creation of a separate bank account might not be sufficient to grant protection to contractors, if not accompanied by other acts by the employer.
These are just a few of positive features of PBA. They might not be commonplace just yet, but positive reception by the Government should put them in good standing for the future.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
