What is a PBA?
PBAs are a payment mechanism, centred on collaborative and integrated team working. They are used as a medium through which interim payments are made directly to the supply chain. Their purpose is to provide a fair payment system through a secure means of payment to principal project parties, while removing insolvency risk.
Risks of poor payment practices
- Leads to additional financing and transaction cost
- Uncertainty of payment erodes trust and undermines collaborative working
- 'Fair Payment’ is concerned with minimising transaction costs and financing charges across projects, and delivering value for money
Project Bank Accounts (PBAs) are identified in the OGC 2008 ‘Guide to Best Fair Payment Practices’ as the most comprehensive single solution to combat the issue of late payment.
Government commits to PBAs
Cabinet office minister Francis Maude has announced plans to increase the use of project bank accounts. At least £4 billion of government spending will be paid directly to SMEs working on public sector construction projects.
The Cabinet Office estimates that 20 per cent of the total spending on government construction will be channelled through project bank accounts within three years. High profile public sector clients including Network Rail, Highways Agency, Environment Agency, Ministry of Justice and Defence Estates are actively introducing PBAs. In addition, many Local Authorities are beginning to introduce PBAs as a means of safe guarding local Small, Medium Enterprises (SME’s).
Will the private sector follow?
The private sector may increasingly seek the benefits of PBAs:
- Greater certainty over payment timing and amounts, especially during this time of economic turbulence, will appeal to clients.
- Minimal set-up costs; may reduce administration and speed up payment
- Shifts in project behaviours may also appeal to the private sector. If a supply chain isn’t paid efficiently, they’re not going to be optimally focused on the project. If the payment process is addressed, the project outcome will improve. Complements partnering and collaborative working.
- Our analysis of past projects suggests that up to 2.5 per cent efficiency savings are achievable.
- Employer gains greater visibility into contractor’s payment arrangements with subcontractors.
Traditionally there has been hesitation over the process itself, with PBAs seen as complex.
Faithful+Gould offers client workshops where organisations can learn more about PBAs and explore their suitability for their own projects. There are some disadvantages and some instances where PBA is not the best route.
We understand the nuances and detail of construction payment structures and advise clients on whether and how to introduce PBAs into their project plans. Where the PBA route is the best one, we identify savings for our clients, facilitate stakeholder buy-in and training, assist in setting up the payment mechanism and capture the data, which will be used to demonstrate the benefits.