Project bank accounts come of age

At the beginning of the year I was a speaker at a seminar on project bank accounts (PBAs) organised by SEWSCAP, the largest-value public sector framework in Wales. The Welsh government (like both the Scottish government and the Northern Ireland executive) has mandated the use of PBAs for projects over £2m.

I was struck by the enthusiasm for PBAs shown by both the speakers and the audience. A speaker from contractor Morgan Sindall was adamant that the cost and administration involved in using PBAs was minimal, adding that they help improve the performance of the supply chain. Another, from Vale of Glamorgan council, was equally supportive: “We were surprised to find the processes involved were very straightforward and have assisted with streamlining our overall payment process.”

PBAs are mandated for UK government projects unless there are “compelling reasons” not to use them. Unfortunately there has been little attempt to collate the “compelling reasons”, let alone challenge them. Nevertheless, Highways England has led the way with £20bn worth of work having been paid for through PBAs by the end of this year. Currently the Environment Agency has almost 120 projects that are using PBAs. The latest major public sector client to announce its intention to use PBAs is HS2.

Andy Cross, rail systems procurement director, said: “HS2 have taken this crucial step to further strengthen their fair payment policies and, in so doing, support companies at all levels of the supply chain through the use of PBAs. This means that companies, big or small, working with HS2 will feel confident and supported as they work together to build Britain’s new low-carbon high-speed railway.”

It has taken 21 years for PBAs to become mainstream. The first PBA was adopted in 1999 on the construction of the Defence Logistics Organisation headquarters in Andover, Hampshire. The Ministry of Defence (MoD) required the main contractor to provide evidence that it had paid its suppliers before it became entitled to payment from the MoD – a sort of inverted pay-when-paid arrangement. But the main contractor was not sufficiently capitalised to be able to agree to this. The solution that was eventually agreed was a PBA. When the main contractor went into insolvency, its insolvency practitioner was unable to access the funds in the account because they were trust funds.

Perhaps, the best outcome in implementing the CLC’s recovery plan over the longer term would be legislation to require that PBAs are used on all construction projects, both in the public and private sectors

Where to next? The continuingly fragile nature of many large tier 1 contractor balance sheets and the covid-19 crisis have given PBAs a renewed momentum. In fact the Reset phase (lasting up to 12 months) of the Construction Leadership Council’s (CLC) recovery plan places a focus on fairer payment. Now that we have had substantial experience of using PBAs, there seems little excuse for clients not to use them. They can also be used to protect retention money. Therefore the CLC should now be insisting that they are used.

Perhaps, the best outcome in implementing the CLC’s recovery plan over the longer term would be legislation to require that PBAs are used on all construction projects, both in the public and private sectors. Last year – on the first anniversary of Carillion’s demise – Debbie Abrahams MP introduced a parliamentary bill to mandate PBAs on all public sector projects over £250,000. This was prompted by one of her constituents, a small business that lost £176,000 as a result of Carillion’s collapse. A similar requirement is now contained in Lord Mendelsohn’s Small Business Commissioner and Late Payments etc Bill, which is currently in the House of Lords.

I would urge the government to either adopt Lord Mendelsohn’s bill or else use the Building Safety Bill to incorporate a compulsory requirement to use PBAs. More than two years ago Dame Judith Hackitt (in her review of the Building Regulations and fire safety) recommended that poor payment practices be addressed since they lead to poor behaviours which, in turn, lead to poor quality.

As regards legislation, the Australian state of Queensland has taken the lead. It has introduced amendments to its Building Industry Fairness (Security of Payment) Act 2017 to compel the use of “project trust accounts” – the new term for PBAs – across the whole of Queensland construction. By 1 July 2022 all projects (both in the private and public sectors) will have to use PBAs; the threshold will be A$1m (£520,000). This change will be backed by criminal penalties (including imprisonment) where, in defiance of the legislation, a PBA is not set up.

A major benefit of PBAs, which is often overlooked, is that they foster collaborative effort. They allow the supply chain to focus on best for project outcomes without the distraction of payment insecurity. Moreover, they must now be seen as providing the solution that enables cash-strapped firms to survive the current crisis. To date there has not been proffered a more effective solution that provides shorter payment times (far less than 30 days and in most case no more than 15 days) and a measure of insolvency protection.

Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors’ Group. He drafted the PBA bill for Debbie Abrahams MP which is attached to his paper, Payment in the construction industry – where are we now? published by the Society of Construction Law in June 2019