Let's make payments safer

Some weeks ago I was extremely gratified to hear a director of a large engineering firm extolling the virtues of project bank accounts (PBAs). His firm had worked on Carillion projects where PBAs had been used and they hadn’t lost any monies in the wake of Carillion’s collapse. A short time ago I was also talking to engineering firms in Northern Ireland (where PBAs have been mandated on £2m-plus government works since 2013) and they were equally enthusiastic about PBAs.

Also read: It’s time to amend the public contracts regulations on payment terms

Since the announcement by the UK government in 2010 that PBAs were to be used on central government projects (unless there were “compelling reasons” not to do so), their use has spread throughout the UK. In October 2016 PBAs were mandated for building works over £4.1m procured by Scottish government public bodies. To date over £1bn worth of public sector work in Scotland will have been paid or will be paid through PBAs over the next few months. Wales has also mandated them for projects over £2m.

The primary objection to PBAs – that they are costly and bureaucratic – seems to have evaporated […] there isn’t a better alternative for guaranteeing regular and secure payments along the supply chain

Australia has followed our example with many states now insisting on PBAs. Queensland has gone one step further. Queensland legislation, introduced in 2018, has mandated the use of PBAs for public sector projects worth over £640,000 and this is being extended to private sector construction this year. A study published by the EU Commission in August recommended that all member states promote the use of PBAs.

In the meantime the business, energy and industrial strategy select committee report Small Businesses and Productivity (5 December 2018) lambasted the lack of progress on payment security. The Prompt Payment Code and Supply Chain Payment Charter got short shrift as verging on useless (those in the industry previously extolling the virtues of the charter now seem less vocal). The committee described payment abuse by the companies as a “disgraceful form of market abuse”.

Last July the House of Commons Public Accounts Committee recommended that the government increase the use of PBAs. The “compelling reasons” get-out for PBAs has not been sufficiently policed by the Cabinet Office. This is in spite of the statement in the government’s construction strategy for 2016-20 that “PBAs are recognised as an effective mechanism for facilitating fair payment to the construction supply chain.” Supply chain firms know that their money is safe and they can be paid within 12 to 15 days.

There are not many “compelling reasons” for failing to use PBAs. Clearly if a project is of very short duration or there are only a few payment “events” there isn’t such a need. But public sector procurers relying on this “get-out” must be challenged and must declare openly their reasons. 

Given the experience to date of PBAs it’s also time to take stock:

• Thresholds for the use of PBAs can be reduced to £1m (or even less)
• PBAs should be extended to all construction-related activity including maintenance (this has been done in Wales)
• Where PBAs are in place, supply chain firms should be informed as to: the name of the PBA bank; the amounts of their progress payments that have been included in instructions to the bank; the dates when the instructions were issued and when the bank will be discharging payments
• Where monies are in dispute they should be kept in the PBA until the dispute is resolved
• Client bodies should ensure that the beneficiaries of the PBA are specified at the outset (if company names are not available, the relevant trades should be specified).

There has been some examples of insolvency practitioners not being aware that the monies in the PBA are trust monies. Where insolvency practitioners are appointed to take over a tier-one contractor’s business they should ensure that instructions are issued to the bank to make the required payments. Where the tier-one contractor is the sole account holder it may be better for the client to have “step-in” rights and thus be able to take over the account.

The increasing use of digital technologies in the banking sector has meant that it has become easier to set up PBAs. One leading bank has established a platform that enables PBAs to be set up with ease from one project to another. This is of particular significance where framework agreements are in place.

The primary objection to PBAs – which is that they are costly and bureaucratic – seems to have evaporated. I’ve never understood what could be more costly and bureaucratic than having different payment systems at each level of contracting, with monies having to cascade through all those levels – and with the real possibility that they will either never reach their intended recipients or, if they do, that it will be some weeks or months before they finally arrive at their destination.

However, I have now come to the conclusion that we should follow Queensland’s example and legislate to mandate PBAs, initially for the public sector, and then for the private sector. To be precise there isn’t a better alternative for guaranteeing regular and secure payments along the supply chain.

Rudi Klein is a barrister, chief executive of the Specialist Engineering Contractors’ Group and president of the NEC Users’ Group