The Scottish government’s announcement that it plans to trial project bank accounts in public sector projects has brought the topic firmly back into the spotlight north of the border.
Following the lead of its fellow devolved government in Northern Ireland, the Scottish government is no doubt keen for the trial to yield positive results for SMEs in the construction sector. After all, it is SMEs that are bearing the brunt of slow cashflow in the current economic climate.
So what will PBAs do to help the ailing construction industry?
Project bank accounts explained
PBAs are, in simple terms, bank accounts set up for a construction project to act as a channel for payment directly to the whole supply chain from the employer.
PBAs are common in England and Wales where most of the standard form contracts have PBA options to simplify the process of setting them up.
Coincidentally, the NEC3 suite of contracts has just been updated to allow drafting options for PBAs south of the border.
“How this can be done, given that not all the parties in the supply chain generally enter into one single contract, is open to question”
The point of PBAs is essentially twofold.
Firstly, to improve cashflow by speeding up payments to contractors and subcontractors in the supply chain.
This is done by avoiding having the employer’s cash detained in various parties’ bank accounts while layers of accounts departments go through the repetitive administrative task of processing payments for the same work.
Secondly, but equally importantly given the alarming number of construction sector insolvencies, they also provide added financial security for the supply chain who get comfort that their fees will be secure in the PBA.
The money in the PBA is held in a trust for the benefit of the supply chain, which protects it from creditors should one of the parties in that supply chain go bust.
The trust gives a right to a trustee (ie supply chain member) over the property of the employer (ie its share of the funds in the PBA) which overrides the rights of creditors in an insolvency situation. Given the current economic climate, this is a valuable protection.
Scottish obstacles for PBAs
This begs the question, however, of why there has been a limited take up on PBAs north of the border. One significant reason would appear to be that the laws surrounding the setting up of a trust in Scotland are more complicated than south of the border.
In England and Wales ‘constructive’ trusts can operate to confer rights onto a party over an asset (ie money in a PBA) without the need for much formality.
In Scotland, however, it is generally recognised that there are certain formal requirements necessary in order to set up a trust to protect a third party’s rights over the assets of another party.
The key requirement is that either the money is physically transferred to the trustee, which is clearly not practicable, or that a formal deed is signed that evidences the rights to be conferred on the trustee.
How this can be done, given that not all the parties in the supply chain generally enter into one single contract, is open to question.
Although the Scottish Building Contracts Committee is working on a Scottish solution, which we are hoping to see later in the year, we have yet to see how the various standard form contracts are going to deal with this issue.
Likewise it is not yet clear if the Scottish Government is going to bring forward its own proposals on how this will be done. Having raised expectations the construction industry will be looking to government to implement its proposals sooner rather than later.
Frazer Wardhaugh is construction partner at law firm HBJ Gateley