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Project bank accounts in Scotland: 15 questions answered

The Scottish Government has recently published new documents for using project bank accounts. What do you need to know?

 In September 2016 the Scottish Government published the following documents on project bank accounts:

  • Implementing Project Bank Accounts in Construction Contracts (23 September 2016) (referred to as ‘the guidance’)
  • Scottish Government Template Trust Deed (referred to as ‘the trust agreement’)
  • Selection Stage Notices and Contractual Enabling Clauses (referred to as ‘the enabling clauses’)

Below is a summary of 15 key questions arising from this initiative – the full guidance note can be accessed at the link below.

1) What is a PBA?

A PBA is a bank account that is opened for a construction project for the purposes of holding money in trust for the benefit of named beneficiaries and dispersing payment direct to them. The account will be opened in the joint names of the employer and main contractor in the capacity of trustees.

2) How is a PBA set up?

Five key aspects of the PBA arrangements are:

  • Enabling clauses
  • Trust agreement
  • Additional party agreement
  • Banking infrastructure
  • Joint instruction

3) In what sequence are the documents entered into?

The PBA documents are entered into in the following order:

  • Main contract: this will be entered into first.
  • Trust agreement: the enabling clauses require the trust agreement to be signed within seven days of main contract signature.
  • PBA bank mandate: the trust agreement then provides for the PBA bank mandate to be signed within 14 days of trust agreement signature.

4) What is the benefit of the PBA arrangements?

Payment is faster, as supply chain members get paid more quickly and payment is dispersed directly to supply chain members from the PBA at the same time as payment is made to the main contractor.

PBAs also provide insolvency protection. Money deposited in the PBA will be ringfenced in the event of main contractor insolvency or another upstream supplier insolvency.

5) In what projects will PBAs be used in Scotland?

PBAs will be used in projects being procured by a Scottish Government body and that are above the specified financial threshold.

6) Are there circumstances where PBAs might not be used?

PBA arrangements might not be used when:

  • There is self-delivery / use of in-house subcontractors;
  • Non-deployment is recommended in the guidance;
  • The supply chain elects not to participate;
  • The main contractor excludes supply chain members.

7) Who can participate in the PBA arrangements?

If the style enabling clauses are followed then in practice all subcontractors of any tier should be able to participate in the PBA arrangements, regardless of the value of their subcontract.

8) How do supply chain members participate?

Supply chain members will participate by way of suitable enabling clauses in their supply chain contract and either by being party to the initial trust agreement or joining the trust agreement through an additional party agreement.

9) What is an additional party agreement?

It is an agreement by which a supply chain member becomes a party to the trust agreement and joins the PBA arrangements (see full guidance for more detail).

10) What will main contractors need to do?

Main contractors will need to carry out various additional tasks and due diligence to implement the PBA arrangements (see full guidance).

11) What will the supply chain members need to do?

Supply chain members will need to carry out various additional tasks and due diligence to implement the PBA arrangements (see full guidance).

12) How will PBA arrangements integrate with the existing payment clauses?

In accordance with the Housing Grants, Construction and Regeneration Act 1996, payment provisions in a construction contract should include a ‘due date’, a ‘payment notice’, a last date for issuing a ‘pay less notice’, and a ‘final date for payment’. The PBA arrangements will need to integrate suitably within that framework.

Also, the drafting between the enabling clauses and trust agreement will need to be consistent and compatible.

At all supply chain levels, the PBA arrangements will not affect an employer’s contractual right to evaluate the amount due to an employed party (ie the former can still adjust a payment application submitted by the latter).

13) Who will pay the PBA bank charges?

The trust agreement provides that the employer will meet any bank charges, money transmission costs and other disbursements incurred in the establishment and operation of the PBA.

14) Will disputed amounts be paid into the PBA?

No. A PBA will only ringfence deposits for payments that have been certified under the main contract. It does not apply to amounts that may be in dispute between supply chain members, which cannot be held in a PBA.

15) Will retention be paid into the PBA?

No. It is not intended that PBAs will become a repository for unpaid cash retention. However, once retention becomes payable, the payment should be processed through the PBA in the same way as other payments.

Craig Bradshaw is a construction partner at Macroberts.

For the full guidance note click here.

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