How do governments ensure that fair payment practices in public sector construction contracts are promoted in a country's construction industry? The UK and Australia now have in place legislation which shows that governments in common-law jurisdictions are increasingly recognising the importance of parties to construction contracts having access to electronic bank accounts where money is held in trust for the contractual supply chain.
The potential benefits are obvious. The importance of timely payments in the construction industry is key; having sums of money available that are protected and ring-fenced for the purposes of payment to contractors and subcontractors benefits all parties. By being set up as trusts, the funds in the accounts can also be protected from the potential liquidation or receivership of employers.
Contractual payment procedures
Since October 2011, a number of UK governmental agencies have adopted Project Bank Accounts ("PBAs") in public sector contracts as a way of protecting sums that have been earmarked by employers for paying contractors. In Australia similar "Security for Payment" arrangements will shortly be adopted. In April 2014 the Department of Finance and Services of New South Wales plans to introduce new laws applicable to construction contracts which will focus on Security for Payment by way of amendments to its existing Building and Construction Industry Security of Payment Act 1999.
The UK government is exceeding its targets in the roll-out of PBAs after paying for £1.4 billion of public works in six months through the initiative. Indeed, the Highways Agency in the UK has adopted PBAs on all contracts awarded since October 2011 unless there is a compelling reason not to do so, for example if the administrative costs of setting up the account cannot be justified by the low value of the project.
It is easy to see the basic advantages of such accounts. Those at the bottom of the payment chain have traditionally felt exposed not only to slow and/or irregular payments from paying parties in the chain above but also to the possibility of the employer above going into liquidation, particularly where, in most cases, the contractor or subcontractor is not a secured creditor and is therefore usually the bearer of the brunt of insolvency in the construction industry.
More often it is main contractors who, rather than applying the correct sums to deserving subcontractors from the money they receive from employers, apply them to more preferred creditors, at the subcontractor's expense. A guarantee of specific funds to be designated on a project-specific basis is therefore popular with subcontractors. However, the benefits work for both the contractors (and subcontractors) and the employers.
Employers are content because they can earmark sums to specific payees on specific projects, while the payee contractor also benefits because his payments should not be affected by any liquidation event suffered by the payer employer. This is because the accounts are effectively in trust, whereby the payee is the beneficiary and the trustees are the parties to the contract.
The UK public sector recognises that having a PBA available can also speed up payments. The UK Highways Agency, which categorises its suppliers into tiers one, two and three, can now pay all tiered contractors from the same PBA. It also means that all tiered suppliers on a single project can be paid at the same time, provided the sums are properly payable under the contract. This guarantees some degree of certainty as to when the payment will be made.
In addition to the guarantee of payment there is also likely to be some savings in the cost of administrating the contract. Disruption, delay and the addtional cost of avoidable supply-chain failure caused by cash-flow shortage would be among the savings. Setting up and administering the PBAs will now be new additional project costs though any interest earned on the account will go to the party chosen to administrate the account. By and large the UK view is that the net costs will still make such arrangements unsuitable for small-scale projects. However, overall, in the UK, such arrangements could help to reduce overall project delivery costs while allowing tiered suppliers to build the benefits of an accelerated payment into their price structure.
In the private sector, the availability in the UK of standard form PBA documentation for public works has been encouraged since the recommendation by the Office of Government Commerce (now a part of the UK Cabinet Office). The Joint Contracts Tribunal ("JCT") offers a standard form by which certainty of payment, decreased vulnerability for subcontractors, fewer payment defaults or disputes and predictable cash flow are encouraged.
In Australia the approach will be more prescriptive overall. The new payments are set to be more wide-ranging, while the introduction of Retention Money Trust Accounts (as the equivalent PBAs in Australia will be called) will be more cautious. Further construction industry consultation will be undertaken following the introduction of the new legislation and this will lead to the drafting of specific regulations. For now, the reforms will concentrate on payment provisions including the introduction of a maximum payment cycle of 15 days for employers to main contractors and 30-day terms for payments to subcontractors. Head contractors will be required to include supporting statements in their claims for payment that confirm that all subcontractors have been paid all sums due. The NSW Department of Finance and Services' measures will even allow Authorised Officers to police the transactions and have search and seizure powers.
How do PBAs or their equivalent work?
The bank accounts themselves differ from a normal account in that the sums held on account are held in trust for nominated suppliers and cannot therefore be accessed by a liquidator or receiver. The legal framework is straightforward. One party, usually the contractor, nominates a bank to act as PBA host. A deed of trust is then entered into by the parties by which each nominated supplier is to be paid directly from the PBA once he has signed the joining deed. In England and Wales, if properly established so that a secure trust is effectively set up, the funds in the account will be protected from other creditors if the employer becomes insolvent.
The Australian statutory construction trust model, the Retention Money Trust Account, though based on the UK PBAs (and US models) remains only at the pilot stage. The Government of New South Wales is proposing to use Retention Money Trust Accounts on 10 government construction projects for 2014. Many observers have felt that such measures do not go far enough. While the intention is to adopt the UK PBA trust protection model, the failure to introduce the Trust Accounts on all projects has been criticised for not protecting the subcontractors whose commercial exposure to main contractor insolvencies "up the line" has been devastating to subcontractors in Australia, as well as those in other countries.
Overall, public sector projects will increasingly be required to adopt PBAs or their equivalents. This should make for fairer and more streamlined payment systems where sums owed are protected and payments are made on time. This has promoted a climate of fairness in public sector construction in the UK because payment funds held in trust are regarded as secure by all parties. In New South Wales, the advantages of such schemes have been acknowledged. It now remains for those new regulations to implement the trust schemes on all public-sector projects as they have been in the UK as well as in many parts of Canada and 16 US states.
International Quarterly is produced quartely by Fenwick Elliott LLP, the leading specialist construction law firm in the UK, working with clients in the building, engineering and energy sectors throughout the world.
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