JCT have produced a supplement that can be used with all of their standard contracts so it becomes a part of the construction contract provisions. JCT's Project Bank Account documentation is for parties to a construction contract who wish to adopt the use of a project bank account as part of fair payment practice.
Updated for the 2011 edition of JCT's suite of contracts, the PBA was originally created as a result of an industry-wide consultation on the use of project bank accounts and is designed to support the Government's fair payment guidelines as part of the construction strategy.
Features of projects using the Project Bank Account Documentation:
- JCT's PBA documentation is designed for use with JCT Standard Building Contracts
- JCT's PBA is best suited to larger projects (which can justify the cost of setting up a PBA) where there are a number of sub-contractors involved.
- PBAs generally have trust status, so the monies in the account can only be paid out to the beneficiaries named in the agreement.
- JCT's PBA is expressed as a deed to reinforce the trust status.
- Money deposited into the PBA is protected in the event of insolvency of the employer and/or contractor, as the money held in the account is 'ring-fenced' due to the trust status.
- PBAs provide greater payment security to the supply chain and may reduce the cost to the client as they help to crystalise payment issues and reduce disputes.
The JCT PBA can be used on both public and private sector projects
How Does it Operate?
- The PBA is set up by the main contractor with the client as a joint named account holder and appended to the contract as a deed of trust between the two parties.
- Subcontractors and suppliers are then added as required under a separate deed to the agreement and they are informed of the existence of a PBA when tendering for packages as this encourages lower bids when security and speed of payment are vastly improved.
- The payment process under the contract continues as normal with the contractor making a monthly application for payment against the contract against which the client team will make is assessment and certification.
- The key difference is within this application the contractor must declare the payments due to the supply chain. The client team has no obligation to check the assessment of these values but they would need to see the individual subcontract interim payment certificates as evidence of the contractually assessed subcontract entitlement.
- When issuing the payment certificate a breakdown of the payment total and instructions to the bank are issued as to how this is split between each of the subcontractors and the main contractor.
- Monies are then transferred by the client into the PBA in good time for the payments to be made. (this usually means payments from the client are slightly earlier than they may otherwise have been direct to the contractor.
- The bank then issues payments directly to each of the parties to the PBA, including the main contractor’s entitlement.
Important Considerations for Developers
- It can be provided for the PBA sub-contractors are only identified by description, on the basis that their names may not be known at the time of signing the contract. The Main contractor will be required to procure that the sub-contractors sign an Additional Party Deed within 7 days of their starting work, making them a party to the PBA.
- In regards to the PBA if the Developer issues a payment notice that shows a different total amount from the application, the contract can be amended to provide for the amounts payable to the sub-contractors under the PBA to be adjusted pro rata. This is consistent with the approach in clause 2.4 of the JCT PBA Supplement. The Developer will not need to take any view on the respective entitlements of the sub-contractors.
- We have provided clarity in relation to what happens if the Developer issues a pay less notice. In this instance the Developer will amend the instructions in accordance with the pay less notice, and the remaining balance in the PBA will be held on trust and released in accordance with the Developer’s instruction.
- A clause can be added to the PBA agreement to clarify that the Developer has no liability to the sub-contractors (except in the case of fraud or dishonesty) and is under no obligation to investigate the sub-contractors’ actual entitlement.
- Under the standard JCT wording, the Employer has to pay into the PBA as and when monies become due under the building contract. This is earlier than would otherwise be the case, i.e. on or before the final date for payment. The Developer would therefore need to run this past the fund as well to ensure the process adheres to the physical drawdown of funds.
The security provided by such an arrangement is primarily directly to the sub-contractors, although there may be collateral benefits to the Employer, for example in mitigating the adverse effects on the project of main contractor insolvency or poor payment practices by the main contractor.
If the main contractor goes insolvent, we do not have the situation where the supply chain have not been paid for several months and hold us to ransom when we wish them to continue on with their duties under another contractor.
However, the security to sub-contractors depends on the monies in the project bank account being held on trust and on the amount to which each party is entitled being identified. Under the JCT wording the parties’ entitlements depend on a joint instruction from the Employer and the Contractor.
The PBA may not apply to all subcontractors as this may not be necessary for lower value appointments but there is the ability to add the key suppliers as and when they were appointed and for them to know of the existence of the PBA.