I have been working for the last few years with various groups within the UK’s Cabinet Office to help drive and introduce alternative procurement process. To date a number of guidance reports and briefing notes have been produced by the UK Government to assist in the introduction of PBA’s, which I have been actively involved with. In addition to supporting the UK Government in driving PBA’s, I am also working with Governments’ further afield, including Western Australia and across Europe.
To date a number of guidance reports and briefing notes have been produced by the UK Government to assist in the introduction of PBA’s...
To assist the industry in understanding PBAs and debunk some of the mystique and fear that surrounds them Faithful+Gould held information seminars across the UK and in both Belfast and Dublin in Ireland.
These seminars were attended by government representatives from various departments and ministries, construction lawyers, developers and property advisors, main and specialist contractors. Below is a re-emphasising of some of the information set out in the PBAs seminar, including an overview of what they mean and a discussion of the advantages.
What is a Project Bank Account?
It 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).
Why Choose a PBA?
PBAs represent a major culture shift in an industry used to factoring late payment and lengthy payment cycles into its business models. The Latham and Egan reports published in the UK in the 1990's identified a highly fragmented industry, unfair payment practices causing significant waste (financial and otherwise) and serious productivity issues through mistrust and confrontation.
PBAs represent a major culture shift in an industry used to factoring late payment and lengthy payment cycles into its business models.
With a construction industry where approximately 80% of resources employed are SME's, traditional payment processes are becoming increasingly unsuitable as 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. Ireland in particular is seeing a rise in the number of experienced specialist subcontractors withdrawing from public sector tendering because of the fear of non payment and the effect on their cash flow and overall business health. PBAs are identified in the UK’s Office of Government Commerce (OGC) 2008 'Guide to Best Fair Payment Practices' as the most comprehensive single solution to combat the issue of these inappropriate payment processes.
So, what are the benefits?
Ring-fenced = security of payment. Once a client has deposited the monies in the PBA the supply chain's cash is safe since the PBA is ring-fenced. This means if any trustees become insolvent, monies within the PBA are safe and the supply chain still gets paid.
Payment efficiencies: Payments out of the PBA are made simultaneously to everybody; payments become more efficient and cash flow management more transparent due to suppliers being paid on time and rightfully owed.
Cost savings: Clients make savings (up to 2½%) as financing charges across the supply chain are reduced. There is a reduction in cash collection as it removes the need for the SME to chase the payment through, which subsequently leads to a reduction in administration costs, and there is a reduction in bank costs as the SME doesn’t have to borrow money to fund the projects.
Collaboration: Benefits aren’t just technical and financial, they are also behavioural. PBAs engender trust within the overall team, as the risk of not being paid is removed. This greater financial transparency leads to an increase in collaboration, quality, confidence and productivity.
Protection against insolvency: Compared to other sectors, the construction industry has the highest rate of insolvencies as businesses struggle to fund ongoing projects due to late payment terms. With PBAs, the impact of insolvency on the supply chain is dramatically reduced, causing less disruption to a project.
Protection for local SMEs: PBAs support both Government’s commitment to promoting the interests of local SMEs. They safeguard them from not getting paid. If poor payment practices are not eliminated, the industry as a consequence will suffer to its detriment. It will lose the experienced quality SMEs, either due to insolvency, or due to their lack of confidence in projects. PBAs are one major step closer to bringing back collaborative working and trust within project teams across the public sector.
Kevin Murphy, director, who hosted the Dublin event in the Merrion Hotel, said the events were a great success giving attendees an insight into PBA’s and both events included lively and informative Q&A sessions. In Ireland the Construction Contracts Act 2013 has now finally been passed and signed by the President.
In Ireland the Construction Contracts Act 2013 has now finally been passed and signed by the President.
This legislation, which was first introduced by Senator Feargal Quinn in the Seanad in May 2010, has been eagerly awaited by the construction industry. The Act sets down statutory rights to payment of specified amounts at specified times and prohibits "pay when paid" provisions in construction contracts for sub-contracts. However it excludes extending these provisions to suppliers. While amendments to the current suite of public contracts will be required to standardise the documents, trialling of PBAs on public sector contracts is another opportunity to bring some additional confidence back to a fragile market.