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When to set up a project bank account

In tough times, project bank accounts can provide certainty to subcontractors and help complex schemes run more smoothly

In the current climate we are likely to hear calls for the use of Project Bank Accounts. PBAs predominantly benefit subcontractors as they are usually the ones that suffer from tardy payment practices.

But the main contractor also benefits as PBAs improve cash flow in the project and the scope for uncertainty, delays and disputes should be reduced.

PBAs are usually set up as a dedicated bank account into which the client pays amounts due to the contractor from time to time. The funds are then released simultaneously to the contractor and its direct supply chain.

The PBA will be supported by a trust deed that will govern how the payments can be used. The parties will agree that the funds can only be used for the purposes of the project.

Where sums are paid directly into the contractor’s bank account the client has no control over how sums are used – a PBA at its most basic will restrict the contractor’s use of the sums.

PBAs can be more sophisticated depending on the project size and the number of parties involved. They can operate by distributing payments directly to those subcontractors who are party to the PBA.

The client will pay the sums certified directly into the PBA and they are then distributed to the parties that are awaiting payment.

There is no need for the contractor to receive and distribute payment from the client directly.

The contractor will assess the sums due and authorise the PBA to make payment to those down the supply chain.

The employer will be required to approve this assessment and payment. The contractor will be paid the balance of the certified payment.

Think first

But certain points need to be considered. For example, if the contractor wants to set off or withhold against payments due to subcontractors, how this is done will need to be looked at.

PBAs help to minimise the risks associated with the insolvency of the contractor. Under traditional payment methods, if the employer pays the contractor and the contractor becomes insolvent before the payment is passed down the supply chain, the subcontractors will have to claim the sums due from the insolvency practitioner.

Their claims will be part of many claims and unsecured creditors. There is no guarantee all or even part of the full sums due will be paid. This in turn can cause financial difficulties to the unpaid subcontractors.

It is possible to structure a PBA so that once the employer has made a payment into the account, the subcontractor will receive the sum due irrespective of the solvency of the
contractor.

This needs to be reflected in the trust deed so that as soon as the payment is made into the PBA by the employer, the contractor holds these sums on trust for the other parties.

The insolvency practitioner will not be able to access these funds if the PBA is protected in this way under a trust deed.

PBAs should lead to better payment practice. This in turn should lead to more competitive pricing by the direct supply chain leading to a lower project cost overall.

The contractor will look for a higher initial margin to reflect its loss of use of the subcontract funds but will also benefit from the improved terms and trust from the subcontractors and, of course, the interest derived while funds are in the PBA.

David Lloyd Jones is a partner in the construction unit at law firm HBJ Gateley Wareing