PBAs prevent late payments to sub-contractors and offer protection from upstream insolvencies. Lowering the risk of non-payment to the supply chain can result in reduced financing and credit control costs. This often results in beneficial pricing of packages and can see an overall reduction in construction costs of between 1-2.5%. The possibility of the PBA replacing part or all of a performance bond, provide the potential for further saving.
Setting up a PBA
In our experience clients and contractors have little experience setting up or using PBAs. Although it’s a straightforward process it is often perceived as a complicated task and therefore not given the priority it needs. This requires a joint effort from the finance and project teams of each organisation as all will be involved in the set up and running of the PBA. It is more effective to implement PBAs on higher value projects due to the associated administrative costs and time dedicated to training.
There are only a handful of banks that offer PBA arrangements including Barclays, RBS and Lloyds Bank. There is little difference in fees and interest charges so if the employer has multiple projects utilising PBAs, it is beneficial for them to select the bank as it will enable them to standardise the set up and operation process.
The PBA must be set up as a trust deed with dual authority as opposed to single authority. The client therefore acts as a secondary authoriser on payments preventing the contractor authorising payments independently.
Selecting a contract
When implementing a PBA it is important to consider what contract to use. Both JCT and NEC have similar provisions and have PBA options, supplements and standard deeds, however under NEC the contractor is contractually obligated to set up the PBA.
A project bank agreement must be entered into within seven days of the building contract. Following this a bank mandate must be signed within 14 days. Throughout construction the PBA should be operated in accordance with these three documents.
PBAs not only increase the visibility and auditability of project payments but can offer cost savings and encourage collaborative working relationships.
These documents should be established before the commencement of works, as their unfamiliarity can result in additional approval time and them not being executed in time for the first valuation. In this instance the contractual obligations can be reinforced to the main contractor but it would be unfair to delay sub-contractor payments, so it may be agreed that a normal payment process is followed initially.
To aid standardisation of the PBA process on a programme of works, we would recommend the client appoint an internal administrator, to be named on the bank mandate, who can help manage the PBA payments and the development of a bespoke deed that best suits client requirements.
To achieve the aforementioned cost savings, the implementation of a PBA should be decided early in the procurement strategy and detailed within the invitation to tender (ITT). This will include a list of the trades/packages to be paid through the PBA and draft copies of the Project Bank Agreement and trust deed. The more sub-contractors who are to be paid though the PBA the higher the potential cost savings achieved, however this will require more administration especially on large scale projects and may deter main contractors. In our experience key trades are listed including piling, cladding, MEP, however new beneficiaries can be added later by signing an additional Party Deed.
The contractor will need to disclose all payments to named beneficiaries within their application for payment. In respect of retention, it is common for contractors to operate a back to back arrangement of their contract terms with sub-contractors, typically leading to 3% or 5% retention values. However, if subcontractor retention is below the rate of the main contract, any difference should be deducted from the main certified payment value to ensure the correct overall retention amount has been applied.
It is important that the payment terms of the PBA beneficiaries, align with that of the main contract. When procuring later packages, particularly prefabricated materials, it is common that scheduled interim payments would breach the terms agreed with those suppliers who require payment upon delivery. In this case it may be that these suppliers are removed from the PBA and monies are paid through the main contractor as normal.
In our experience the incorporation of a PBA encourages the contractor to be more open with the subcontractor applications. This often extends beyond the named beneficiaries and leads to a more collaborative approach to certifying works and closer working in the supply chain.
PBAs not only increase the visibility and auditability of project payments but can offer cost savings and encourage collaborative working relationships. The slow uptake of PBAs is largely due to inexperience of parties, but with early engagement and clear contractual obligations they can be an effective tool to alleviate common payment problems in the construction industry.