PBAs: Tell it like it is

There has been a deafening silence in the wake of a report of the National Audit Office (NAO) lambasting government clients on their payment record. The NAO was particularly scathing about the lack of monitoring of payment performance in the supply chain. Paying tier 1 contractors within five to 10 days, without more assurances that they would pay their supply chain promptly, simply boosted their cash flow, said the NAO. One of the NAO’s recommendations was to extend the use of project bank accounts (PBAs).

Highways England (HE) (formerly the Highways Agency) is now using PBAs on all its works. Currently there are over 35 PBAs in operation across a suite of major road schemes and maintenance contracts. By 2020 £20bn worth of highways work will have been paid through PBAs. On average tier 3 contractors are being paid within 19 days of the assessment date in the main contract. This is a huge achievement.

One supplier wrote to HE as follows: “The PBA enables us to manage our business more effectively… and enables us to pay our suppliers on a similar basis reducing their cash flow borrowing and associated costs.”

But HE is not alone. The Environment Agency, Ministry of Justice and Defence Infrastructure Organisation are making regular use of PBAs. They are now increasingly used in the wider public sector.

Where `responsible payment terms’ are applied PBAs are not necessary. But if firms are paying responsibly they should not have any issue with PBAs

Many lead contractors are now acknowledging the added value of PBAs, in particular, the fact that they engender a greater collaborative effort along the supply chain. Those who have taken the trouble to familiarise themselves with PBAs have found this to be an added bonus when bidding for public sector work. A particular benefit of PBAs for one large contractor was the removal of the risk of having to pay twice – once to a tier 2 contractor, which then goes into insolvency, and second to a tier 3 contractor which is threatening to remove expensive equipment from the site because of non-payment. If the tier 3 contractor is a beneficiary, under the PBA, he would be paid.

But some lead contractors are still battling PBAs. Initial attempts to derail them on the basis that they gave rise to complications with the construction industry tax scheme and VAT were scotched by HMRC. Then they brought in hired guns from the likes of Pinsent Masons and, more recently, Deloitte. Deloitte claimed main contractors could lose “opportunity costs” of £10m per annum. In other words, the opportunity to use the supply chain’s cash in other parts of their businesses or for other purposes (such as overnight lending to financial institutions).

Last year Willmott Dixon went public with their views on PBAs. Where “responsible payment terms” are applied PBAs are not necessary. But
if firms are paying responsibly they should not have any issue with PBAs. PBAs compress payment cycles so everyone receives payment at the same time.

More subtle means are now being deployed. Some contractors have decided the best means of attack is to deceive clients and their supply chains about PBAs. Here are some examples:

• Clients don’t need to specify the beneficiaries This enables lead contractors to confine the PBA to, for example, firms they own or to other members of a joint venture
• Supply chain firms don’t see any benefit in having PBAs What a surprise when the only information a firm is getting comes from the main contractor
• PBAs are bureaucratic There are some formalities such as the bank mandate, trust deed and joining deed, but what is more bureaucratic than having in place hierarchical systems of payment? The trust deed is solely for the purpose of ring-fencing the account as a trust account, so that the supply chain has protection against an upstream insolvency
• PBAs are costly On average PBAs cost no more than £500 to set up and maintain. Some contractors have alleged that the cost to them runs into thousands but no evidence has ever been produced of how these costs have been incurred or how they have been broken down
• PBAs are onerous for clients Generally speaking clients will have to include reference to PBAs in their tender invitations (all the standard contracts have PBA provisions) and jointly authorise alongside the contractor payment out of the PBAs. It’s not clear how this can be regarded as particularly onerous.

Public sector clients must be more assertive if they decide to go for the PBA option. They should list the intended beneficiaries and ensure that the PBA process is made transparent along the supply chain. There is absolutely no reason why Highways England’s achievement cannot be replicated throughout the UK public sector.

Professor Rudi Klein is a barrister and CEO of SEC Group