Advantages of Project Bank Accounts

Steve Jackson
With the rising cost of performance bonds, I look at the potential of Project Bank Accounts by private developers as a viable alternative.

A Project Bank Account (PBA) is a ring-fenced bank account out of which interim payments are made directly and simultaneously to a lead contractor and members of their supply chain. The PBA must have trust status; monies in the account can only be paid to the beneficiaries – the lead contractor and supply chain members. The account is held in the names of the trustees who are likely to be the client and lead contractor (but members of the supply chain could also be trustees).

Benefits of a project bank account include:

  • Ring-fenced = security of payment
  • Payment efficiencies
  • Cost savings
  • Collaboration
  • Protection against insolvency

Why a PBA?

Historically PBAs have been used on publicly funded projects as they originated for the Government’s fair payment procedures. Today, with the rising real terms costs of performance bonds, PBAs offer a viable and more cost-effective alternative to provide additional security to clients in times where contractors’ margins are coming under pressure from rising supply chain costs.

PBAs can offer security of payment down the supply chain.

A PBA greatly reduces the fear of non-payment with a subsequent positive effect on cash-flow. Our construction industry has approximately 80% of resources employed in SME's. Increasingly these firms are having to devote more of their overheads to secure their cash flow, risking programme delays and insolvencies. The inefficiencies that these poor payment practices create can be detrimental to project delivery. The fear of nonpayment and the effect on their cash flow and overall business health can cause the supply chain to review who they work for.

A real benefit to a PBA is that they usually come without any uplift in cost in contrast to a more traditional performance bond where we are typically seeing the cost increase up to 1% of the contract sum without the reassurance the supply chain will be paid.

Would I Recommend a PBA?

My experience of working with PBAs has been very positive. Whilst there is more time and effort that goes into getting a PBA set-up and ensuring the supply chain is appointed early into the contract for the most part, the security this provides for the project delivery team far outweighs the initial start-up time. It also allows the Developer a broader scope for smaller, niche specialist firms who may only operate with a handful of practitioners and cannot afford to risk non-payment.

If the supply chain are being paid on time they tend to perform better and be fully focussed on delivery of the end project...

The main challenge around a PBA for the project team is to encourage contractors to use them. Our experience is that main contractors prefer not to instigate them. The downside for the contractor being it prevents the use of lengthy payment terms of 90-120 days and the opportunity to use the cash flow they receive from the client for other purposes rather than paying the supply chain on the particular project. It will not be possible to change this for all main contractors on all large sites but my team within Faithful+Gould is experienced in working with Project Bank Accounts and dispelling concerns a major Contractor may have in not using them.

PBAs can offer security of payment down the supply chain. If the supply chain are being paid on time they tend to perform better and be fully focussed on delivery of the end project, alongside adding protection to the employer if anything should happen to the main contractor, you can be sure the money you are paying out is being passed onto the supply chain.

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