There has been much discussion in recent months about Project Bank Accounts (PBAs) and whether they are beneficial to the construction industry. So what is all the fuss about? The Office of Government Commerce (OGC) has adopted PBAs as part of its campaign for greater transparency and fairer payment practices in the construction industry. The aims are that the PBA is held on trust jointly by the employer and main contractor and that stage payments are paid directly to the main contractor and supply chain out of the PBA (rather than through the employer or main contractor).
This certainly increases transparency. The employer can see what monies are being transferred, where and to whom. Further, monies should no longer disappear off the radar and sit for months in the main contractor's account, often for inequitable cashflow purposes. The PBA is also protected from insolvency of the main contractor, since the monies are ring-fenced from third party creditors.
In this difficult economic climate PBAs appear to streamline the payment process and provide greater security for subcontractors. This could potentially help to promote recovery in the construction industry. The OGC's guidance estimates that approximately £750 million will be saved through use of PBAs. Similarly the banking sector estimates that operation of PBAs will be cost neutral for projects of a value greater than £5 million. But do they and will they work?
The answer lies in the drafting of PBA agreements. The NEC, JCT and PPC 2000 have each issued draft PBA Agreements, which reflect the underlying principles of the OGC's commitment to greater transparency and security but there are inconsistencies between drafting in the relevant building contracts and the PBA agreements.
For example the JCT PBA agreement suggests that bank mandates should be entered into within 21 days of the date of the agreement. The PBA agreement itself must be entered into within 7 days of entering into the JCT05 contract. This could mean that the main contractor has carried out work and potentially achieved its first milestone/stage payment date before the PBA has been properly set up. The drafting does not appear to deal with this possibility.
The JCT PBA also has another, albeit minor inconsistency. The PBA agreement suggests that there may be less money in the PBA than that authorised by the employer for payment to the main contractor. It is not clear why the employer (as account trustee) would authorise less money to be transferred to the PBA than it has authorised in accordance with the terms of the JCT contract.
In conclusion, PBAs may hold the key to a more streamlined payment process which accommodates the OGC's principles of fairer payment practices. However, at present it appears that the public sector are taking up the offer of PBAs with more enthusiasm than the private sector and one suspects that this will continue to be the case until the PBA documentation is amended.
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