Cash is king in the construction industry and effective cashflow is the lifeblood of progress on site.
Several attempts have been made over the years to solve the age-old problem of late payment practices which has bedeviled the industry including Construction Act 1996 and Late Payment of Commercial Debts (Interest) Act 1998.
The problem persists and the Office of Government Commerce (OGC) is promoting the use of project bank accounts (PBAs) as the latest solution.
It anticipates saving the public sector £750m.
Accordingly, the NEC, JCT, and PPC 2000 have all issued PBA agreements reflecting the underlying principle of the OGC’s commitment to greater transparency and security.
How PBAs work
PBAs in operation ensure that the contractor and the supply chain receive prompt payment for monies due to them through the payment mechanism in the contracts.
The idea is that the PBA is set up jointly by the employer and contractor through a trust deed agreement under which all payments are authorised to be made by the bank to the contractor and the supply chain.
PBAs increase transparency and the employer can see where, when and how much money is being transferred to the supply chain, preventing the money from sitting in the principal contractor’s bank account without finding its way down the supply chain.
This increases trust and collaboration leading to fewer disputes and better value for money including better productivity. Parties can also avoid insolvency risks.
Problem and solution
But PBAs have simply not been popular; take-up has been quite limited in public sector contracts and almost non-existent in private sector contracts.
The question is why? And how can the industry increase the uptake?
The following conceptual difficulties require attention:
- PBAs do not provide any solution to the problem of employer insolvency, since the amounts paid into the account at any point in time are the amounts already certified as being due to the contractor and the supply chain.
- PBAs attempt to address the difficulties in getting payment from the contractor down to the supply chain but they do not address the difficulty in getting payment from the employer to the contractor.
- The contractor who might otherwise have negotiated discounts for early/timely payment to members of the supply chain is denied that incentive.
- The OGC fair payment charter for use with NEC contracts provides that the parties to the PBA trust deed agree that the charter is not intended to be a legally binding document and is not to be used in construing of any contractual commitment.
- In certain circumstances where there is a shortfall in the PBA for payments to the contractor and the supply chain the contractor is required to make up the shortfall, not the employer.
Given the pivotal role of the contractor, any mechanism that seeks to address the concerns of the supply chain any greater than the contractor’s will remain unpopular.
As such, the concept of PBAs needs to be updated to better incentivise the contractor.
Produced by 4-5 Gray’s Inn Square in association with Construction News. Samuel Okoronkwo is a practicing barrister at 4-5 Gray’s Inn Square. He specialises in planning, construction and engineering law and can be found at samuelokoronkwo.com, or contact his clerk at firstname.lastname@example.org